What Does Fiduciary Duty Mean?
In brief, fiduciary duty is a requirement that a person in a position of trust, such as a real estate agent, broker, or executor, must act in good faith and honesty on behalf of a client. Fiduciary duty is a legal obligation of the highest degree for one party to act in another’s best interest.
The person to whom a fiduciary owes their duty is the principal or beneficiary. Accordingly, the fiduciary must work to the best of their ability to benefit the principal and bring about a satisfactory result or capable stewardship of the principal’s assets.
Here is an article for more detailed information relating to the meaning of fiduciary duty.
Who is Considered a Fiduciary?
While courts have not designated circumstances that constitute fiduciary relationships, theoretically, anything that two individuals agree upon as a fiduciary relationship is one. Some relationships are routinely expressed as fiduciary. These relationships are:
- Executor and heir
- Trustee and beneficiary
- Principal and agent
- Broker and principal
Due to the duties associated with taking on one such responsibility, fiduciary duty is commonly understood as a legal concept, even though many of the above relationships have a financial component.
Whether or not an investment or financial advisor is a fiduciary depends on their actions. For example, if they provide advice on an ongoing basis, they are a fiduciary. On the other hand, if the advisor merely sells products, they are not a fiduciary.
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4 Types of Fiduciary Duties
Fiduciary duties are bundled into three, sometimes four, different specific responsibilities.
Duty of Care
An office or director’s duty of care is found in their duty to exercise sound business judgment. They use consideration when making decisions for the business. Exercising proper duty of care looks like prudently considering business options and making a reasonable decision based on the information is a good faith act.
The standard for the duty of care is based on what a person “in a like position would reasonably do under similar circumstances.”
Duty of Loyalty
This duty exemplifies the selflessness that defines a fiduciary duty. The duty of loyalty commands a director to always act responsibly for the company and always act in the company’s best interests rather than oneself. The duty of loyalty is expected when making decisions and when refraining or excluding oneself from making business decisions.
Duty to Act Lawfully
This duty is self-explanatory. Expected to act per the law is part of an officer’s fiduciary duties. Reasonably, one would not merit trust from the company’s shareholders if an officer did not follow the law when making his business decisions.
Duty to Act With/In Good Faith
This duty is not always recognized explicitly because it can be inherent to the first duty. This duty, as mentioned previously, represents an officer or director’s genuine belief and trust that his decision for the business will be beneficial to the company.
As a fiduciary, the rule of thumb is to always act in your client’s best interests or the company and shareholder’s best interests.
Fiduciary Duty Examples
Following are some fiduciary examples.
Attorney/Client
This is one of the most stringent of fiduciary relationships.
Attorneys are held liable for breaches of their fiduciary duties by the client and are accountable to the court in which that client is represented when a breach occurs.
The U.S. Supreme Court has stated that the highest level of trust and confidence must exist between an attorney and a client. As a fiduciary, an attorney must act in complete fairness, loyalty, and fidelity in every action taken on behalf of the client.
Agent/Principal
This is a more generic example of fiduciary duty. Any person, corporation, partnership, or government agency might be called upon to act as a principal or agent. In this case, the agent is legally obliged to act on behalf of a principal without a conflict of interest.
A typical example of an agent/principal relationship that implies fiduciary duty exists between the shareholders of a company and the executives of the company. The shareholders expect that the executives will make decisions based on their interests as owners.
Trustee/Beneficiary
Under a trustee/beneficiary duty, the fiduciary has legal ownership of the property and controls the assets held in the name of the trust.
The trustee/beneficiary relationship is an essential aspect of comprehensive estate planning. Therefore, special care should be taken to determine who is designated as trustee.
What Constitutes a Breach of Fiduciary Duty?
Breaches of fiduciary duty can have significant consequences for the fiduciary’s finances and reputation.
Some ways to breach fiduciary duty are:
- If a fiduciary relationship existed at the time of dispute
- The breadth of relationship and fiduciary duties
- If any duties were breached within the context of the relationship
Any behavior that is not in the client’s best interest; any action that solely benefits the fiduciary; or any failure on the part of the fiduciary to be completely transparent with important information is a breach of fiduciary duty.
A contract can define the scope of the relationship and fiduciary duties if no statute defines the fiduciary relationship.
Business and Fiduciary Duty
Structuring your business or nonprofit as a corporation creates fiduciary responsibilities or trust obligations. Traditionally, corporate directors and officers owe fiduciary duties to the corporation and its stockholders.
In certain circumstances, fiduciary duties may also apply to controlling stockholders who possess a majority interest in or exercise control over corporate business activities but not to other ordinary shareholders.
Following are the key fiduciary duties owed to a corporation and its stockholders.
- Fiduciary Duty of Obedience
- Fiduciary Duty of Loyalty
- Fiduciary Duty of Care
- Fiduciary Duty of Good Faith and Fair Dealing
- Fiduciary Duty of Disclosure
Real Estate and Fiduciary Duty
Real Estate agents have six fiduciary duties they are responsible for upholding.
- Disclosure. You, as the agent, must always disclose any information to your client that would help them in negotiating. For example, if there are any issues with the property, this information should be disclosed in the real estate contract.
- Accounting. You, as the agent, must never commingle funds received from a client into your personal or business funds. All funds should be kept separate. This fiduciary duty also extends to any property, deeds, or other documents entrusted to you by the client.
- Loyalty. As an agent, you must always put your clients’ interests above your own. This duty is considered one of the most fundamental duties of a real estate agent.
- Care and Diligence. You must always use all your skills to the best of your ability for the client.
- Confidentiality. Any information given to you by the client in a confidential manner must be kept confidential if that information would hurt the client during any round of negotiations.
- Obedience. You also must obey any lawful orders your client gives you. But, conversely, you are not bound by any unlawful requests made by the client.
As you now know, fiduciary duties are not to be taken lightly. People can be and have been sued for breach of fiduciary duties.
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