You may not realize it, but understanding fiduciary duty is important for everyone, not just lawyers. First, a fiduciary duty is the requirement that certain professionals, like attorneys or financial advisors, work in the best financial interest of their clients. By law, members of some professions with clients are bound by fiduciary duty.
Forbes’ recent article entitled “What Is Fiduciary Duty?” explains that in a fiduciary relationship, the person who must prioritize their clients’ interests over their own is called the fiduciary. The person getting the services or assistance is called the beneficiary or principal.
You will frequently see a fiduciary relationship with certain types of professionals, like attorneys and financial advisors. A fiduciary duty is a serious obligation, and if a fiduciary doesn’t fulfill his or her duties, it’s known as a breach of fiduciary duty. Fiduciaries must act in a beneficiary’s best interest. They have two main duties: duty of care and duty of loyalty. Fiduciaries may have different or additional requirements, depending on their industry.
With the duty of care, fiduciaries must make informed business decisions after reviewing available information with a critical eye. Lawyers must act carefully in performing work for clients. Care is determined by the prevailing standards of professional competence in the relevant field of law and geographic region. To abide by the duty of loyalty, fiduciaries must not have any undisclosed economic or personal conflict of interest. They can’t use their positions to further their own private interests. For example, fiduciary financial advisors might adhere to the duty of loyalty by disclosing recommendations from which they’ll receive a commission.
Other common professions or positions that require fiduciary duties include directors of corporations and real estate agents, as well as those discussed below:
Trustee of a Trust. When you want your assets to transfer to someone after you die, you can put them into a trust. The trustee who’s in charge of the trust has a fiduciary duty to manage the trust and its assets in the best interests of the beneficiary who will one day inherit them. There are different types of trusts. Understanding fiduciary duty that exist with trusts is critical.
Estate Executor. The person who manages your estate and handles your affairs is your estate executor. He or she has a fiduciary responsibility to your heirs and next of kin to distribute the estate according to your wishes. When you make a will, choosing an executor is among the most important decisions and understanding fiduciary duty can help you make it.
Lawyer. Your attorney must disclose any conflicts of interest and must work with your best interests in mind.
Financial Advisors. Financial advisors who are fiduciaries must act in the best interest of their clients and offer the lowest cost financial solutions to fit their clients’ needs. However, it important to note that not all financial advisors are fiduciaries.
Reference: Forbes (July 28, 2020) “What Is Fiduciary Duty?”