Many professionals may owe fiduciary duties to beneficiaries, colleagues, or co-owners in a business. But what is a fiduciary, and who is a beneficiary? Who might owe a fiduciary duty? How do I abide by my fiduciary responsibilities if I have any? This article will cover the basics of fiduciary duties so that you may understand and comply with them.
What Are Fiduciary Duties?
A fiduciary duty is an obligation for a fiduciary to work in the best financial interest of their beneficiary. In other words, when someone has a fiduciary duty, the person with the duty has the responsibility to act in someone else’s best interest. Fiduciary duties are typically legal duties imposed on particular groups of professionals, corporate managers, estate administrators, or business members (i.e., partners, LLC members, LLC managers, or corporate leaders).
Moreover, there are many types of duties that a fiduciary owes to their beneficiary.
Types of Fiduciary Duties:
- Care
- The Duty of Care requires that the fiduciary act with good faith and honesty and demonstrate ordinary and reasonable care in discharging their responsibilities. This means that a fiduciary cannot push their obligation to the beneficiary to the side; they must exercise the diligence that a reasonable fiduciary under the same circumstance would exercise.
- Loyalty
- The Duty of Loyalty requires the fiduciary to act with undivided loyalty toward the beneficiary (or the company in a business setting). Undivided loyalty means the fiduciary must put the beneficiary or business’s financial interest above their own. The fiduciary should avoid conflicts of interest and self-dealing. Self-dealing occurs when the fiduciary uses their position of authority to grant themselves financial or other benefits.
- Good Faith
- The Duty of Good Faith means that fiduciaries must act with a conscious regard for their responsibilities in that role. Intentional neglect of fiduciary duties demonstrates a potential breach of good faith.
- Confidentiality
- The Duty of Confidentiality requires the fiduciary not to disclose non-public information. The type of information that needs to remain confidential may differ depending on the type of fiduciary. Different professional fiduciaries may be required to abide by stricter confidentiality rules. In general, fiduciaries should avoid sharing important private information about their beneficiaries.
- Prudence
- Prudence is a reasonable standard of judgment. Under the duty of prudence, a fiduciary should exercise the same reasonability of judgment that a prudent fiduciary would exercise under the same circumstances.
- Disclosure
- The Duty of Disclosure requires fiduciaries to act with total candor to their beneficiaries. A fiduciary cannot hide material information pertinent to their financial responsibilities towards the beneficiary or the company.
Types of Fiduciaries
The following chart illustrates some of the most common types of fiduciaries and their responsibilities toward their beneficiaries and/or the business.
| Fiduciary | Beneficiary | Responsibilities |
| Corporate Officer | Shareholders | In a publicly traded or closely held corporation, the corporate officers and the corporation’s board of directors have a responsibility to work for the financial gain of the shareholders. The duties enumerated above apply to high-ranking corporate officers, and the shareholder beneficiary can legally enforce these responsibilities in the case of a breach. |
| Lawyer | Client | In many instances, a lawyer acts as the fiduciary for their client in the lawyer’s practice. If a lawyer is helping a client with a business transaction, the lawyer, as a fiduciary, has a responsibility to maintain his client’s best interests. |
| Trustee | Beneficiary | When a trustee (including lawyers, family members, and professional trust administrators) administers a trust, they owe a responsibility to the trust beneficiary. The trust document itself may outline the exact way in which the trust should be dispersed, and the beneficiaries have the power to compel the trustee to adhere to the trust document. |
| Guardians | Wards | A court-appointed guardian manages and administers the financial assets of their ward. The ward may be a child or an incapacitated adult, but the guardian must adhere to his fiduciary duties in exercising their role in both circumstances. |
| Investment Company | Investors | Many investors give their money to investment companies to invest on their behalf. These investment companies are fiduciaries to the investors and must exercise their duties in managing the investor’s assets. |
| Insurance Companies | Policyholders | An insurance company may be a fiduciary for their policyholders or agents. When a policyholder buys a plan from an insurance company, they establish a financial relationship for which the insurance company is responsible. |
Breaches of Fiduciary Duty
Each fiduciary duty can be breached in various ways.
Breach of Duty of Care
A breach of the duty of care may include a corporate officer engaging in a multi-million-dollar business transaction without conducting adequate research into the sale. If the business transaction results in a major loss to the corporation due to insufficient preparation and research, the corporate officer may have breached his duty of care. The officer was responsible for conducting due diligence before engaging in any significant business interactions, especially if doing so could have avoided a great financial loss to the shareholders.
Breach of Duty of Loyalty
The duty of loyalty may be breached when a trustee administers a trust that instructs them to sell a house. The trustee likes the house, so he sells it to himself for below market value. This is a clear breach of the fiduciary relationship. Firstly, the trustee was responsible for seeking the greatest price on the house for the beneficiary. Secondly, the trustee has engaged in self-dealing and has actively created a conflict of interest between themselves and the trust beneficiaries.
Breach of Duty of Confidentiality
A breach of the duty of confidentiality may occur when a lawyer is engaged with a client on a sensitive car accident lawsuit. The client tells his lawyer that he may have run a red light before getting into the car accident. If the lawyer immediately goes to the opposing counsel and informs them that the client may have run a red light, this breaches the duty of confidentiality. As professionals and fiduciaries, lawyers are responsible for advancing their client’s best interests and adhering to attorney-client privilege. Informing the other lawyer of the information the client disclosed in confidence results in a breach of fiduciary duty.
In a business setting, if two corporate officers discuss confidential client information in a public environment, they may breach their duty of confidentiality. Third parties may hear that information, which could lead to a breach.
Breach of Duty of Prudence
A prudent trustee always runs a title search on the real property before buying or selling real estate on behalf of the trust. However, the trustee sees a property they believe would be great for the beneficiary and doesn’t want to waste time running a search. After buying the property, it turns out the seller didn’t have title to the property. In this case, the trustee might have violated the duty of prudence because a prudent trustee always runs a title search on real property.
Breach of Duty of Disclosure
Finally, imagine that manufacturing company X is issuing their securities prospectus to inform their shareholders about the company’s performance. However, when issuing the prospectus, they decided to leave out the fact that their main manufacturing facility had just exploded and would be out of commission for several months. The omission of the information from the prospectus may violate the duty of disclosure because the company and its officers were responsible for disclosing that information to the shareholder-beneficiary.
How to Ensure Those Required to Are Abiding by Their Fiduciary Duties
The first and most important way to abide by fiduciary duties is to understand if you are a fiduciary. Professionals, such as lawyers, investment companies, financial advisors, and corporate directors, should understand fiduciary responsibilities well because it is part of their job.
However, in instances such as guardian-ward or trustee-beneficiary relationships, the fiduciary may be a family member or friend. It is crucial, then, that if you are appointed as a guardian or a trustee, you do your research on what your responsibilities are. In cases where the court appoints you as a fiduciary, the court should be able to answer questions as to your duties in the given jurisdiction.
Duty Throughout Relationship
Moreover, if you are in a fiduciary relationship, you must exercise all the enumerated duties so long as that relationship with the beneficiary exists. If, as a fiduciary, you become overwhelmed by work, life, and health problems, it is incumbent on you to recuse yourself as a fiduciary.
For financial advisors, corporate officers, or other types of professional positions, transparency with the client, your company/employer, and other members of the company that you may be a corporate officer in is crucial.
For lawyers, recusal may look different in different roles and jurisdictions. For example, an attorney can attempt to withdraw from the representation of a client with the client’s permission. If the client denies it, the attorney must go to a judge and explain why they feel they can no longer adequately represent their client. Permitted recusal is better than neglecting fiduciary responsibilities because ignoring or failing to meet your fiduciary duties can lead to legal liabilities or other punitive actions.
Conclusion
As a fiduciary, it is important to stay educated so you can understand your responsibilities and how to meet them. Questions about fiduciary duties? Contact our experienced corporate lawyers today for a free consultation.
