What is Fiduciary?

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.

A fiduciary may be responsible for the general well-being of another (e.g., a child’s legal guardian), but the task often involves finances—for example, managing the assets of another person or a group of people. Money managers, financial advisors, bankers, insurance agents, accountants, executors, board members, and corporate officers all have fiduciary responsibility.

A fiduciary is legally bound to put their client’s best interests ahead of their own. Fiduciary duties appear in a range of business relationships, including a trustee and a beneficiary, corporate board members and shareholders, and executors and legatees.

An investment fiduciary is anyone with legal responsibility for managing somebody else’s money, such as a member of the investment committee of a charity. Registered investment advisors and insurance agents have a fiduciary duty to clients. Broker-dealers just have to meet the less-stringent suitability standard, which doesn’t require putting the client’s interests ahead of their own.

A fiduciary’s responsibilities and duties are both ethical and legal. When a party knowingly accepts a fiduciary duty on behalf of another party, they are required to act in the best interest of the principal (i.e., the client or party whose assets they are managing). This is what is known as a “prudent person standard of care,” a standard that originally stems from an 1830 court ruling.

This formulation of the prudent-person rule required that a person acting as fiduciary was required to act first and foremost with the needs of beneficiaries in mind. Strict care must be taken to ensure that no conflict of interest arises between the fiduciary and their principal.

In many cases, no profit is to be made from the relationship unless explicit consent is granted when the relationship begins. As an example, in the United Kingdom, fiduciaries cannot profit from their position, according to an English High Court ruling, Keech vs. Sandford (1726). If the principal provides consent, then the fiduciary can keep whatever benefit they have received; these benefits can be either monetary or defined more broadly as an “opportunity.”

Estate arrangements and implemented trusts involve both a trustee and a beneficiary. An individual named as a trust or estate trustee is the fiduciary, and the beneficiary is the principal. Under a trustee/beneficiary duty, the fiduciary has legal ownership of the property or assets and holds the power necessary to handle assets held in the name of the trust. In estate law, the trustee may also be known as the estate’s executor.

Note that the trustee must make decisions that are in the best interest of the beneficiary, as the latter holds equitable title to the property. The trustee/beneficiary relationship is an important aspect of comprehensive estate planning, and special care should be taken to determine who is designated as trustee.

Politicians often set up blind trusts to avoid real or perceived conflict-of-interest scandals. A blind trust is a relationship in which a trustee is in charge of all of the investment of a beneficiary’s corpus (assets) without the beneficiary knowing how the corpus is being invested. Even while the beneficiary has no knowledge, the trustee has a fiduciary duty to invest the corpus according to the prudent person standard of conduct.

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