What Is a Fiduciary Duty? Examples and Types Explained

Fact checked by Katrina MunichielloReviewed by Julius Mansa

What Is a Fiduciary Duty?

Fiduciary duty refers to the relationship between a fiduciary and the principal or beneficiary on whose behalf the fiduciary acts.

The fiduciary accepts legal responsibility for duties of care, loyalty, good faith, confidentiality, and more when serving the best interests of a beneficiary. Strict care must be taken to ensure that no conflict of interest arises to jeopardize those interests.

Key Takeaways

• A fiduciary duty involves actions taken in the best interests of another person or entity.
• Fiduciary duty describes the relationship between an attorney and a client or a guardian and a ward.
• Fiduciary duties include duty of care, loyalty, good faith, confidentiality, prudence, and disclosure.
• It has been successfully argued that an employee may have a fiduciary duty of loyalty to an employer.
• A breach of fiduciary duty occurs when a fiduciary fails to act responsibly in the best interests of a client.

Examples of Fiduciary Relationships

Trustee/Beneficiary

A single parent with young children might create a trust to administer the assets that the children would inherit should the parent die while the children are still underage.

In this case, the parent will name a person or an entity, such as a law firm or bank, as trustee of the estate. That person or entity has a fiduciary duty to the children, who are the beneficiaries of the estate.

In a trustee/beneficiary relationship, the fiduciary (trustee) has legal ownership of the property and controls the assets held in the trust.

As fiduciary, 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. Special care should be taken to determine who is designated as trustee.

Guardian/Ward

In a guardian/ward relationship, an adult is designated as the legal guardian of a minor child. The guardian, as the fiduciary, is tasked with ensuring that all matters related to the daily welfare of the child are dealt with responsibly and in the best interests of the child. This care can include such things as deciding where the child will attend school, arranging for health care, and providing an allowance.

A guardian may be appointed by a state court when a parent dies or is unable to care for the child for other reasons. In most states, the guardian/ward relationship remains intact until the minor child reaches adulthood.

Agent/Principal

Any person, corporation, partnership, or government agency might be called upon to act as agent without conflict of interest on behalf of a principal.

A common example of an agent/principal relationship that implies fiduciary duty is that between the executives of a company and its shareholders. The shareholders expect that the executives will make well-considered, prudent decisions on their behalf and in their best interests as owners.

A similar fiduciary relationship exists between personal investors and the fund managers they select to manage their assets.

Attorney/Client

The agreement between an attorney and a client is arguably one of the most stringent of fiduciary relationships.

The U.S. Supreme Court has stated that the highest level of trust and confidence must exist between an attorney and a client. An attorney, as a fiduciary, must act with fairness, loyalty, care, and within the law on behalf of the client.

Attorneys can be sued for breaches of their fiduciary duties by clients. They are accountable to the court in which a client is represented when a breach occurs.

Controlling Stockholder/Company

In certain circumstances, fiduciary duties may be required of a stockholder who possesses a majority interest in a corporation or who exercises control over its activities. A breach of fiduciary duty may result in personal legal liability for the controlling shareholder as well as directors and officers.

Important

The adjective fiduciary means held or given in trust. A fiduciary commits to acting in the best interests of a principal or beneficiary.

Types of Fiduciary Duties

Fiduciary duties may differ depending on the type of beneficiary that a fiduciary serves. However, in general, the legal and ethical obligations related to protecting the interests of beneficiaries include the following duties.

Duty of Care

This is the responsibility to inform oneself as completely as possible in order to exercise sound judgments that protect a beneficiary’s interests. It can involve the thoughtful consideration of options and sensible decision-making that’s based on a careful examination of available information.

Duty of Loyalty

This pertains to acting in the best interest of the beneficiary at all times, putting their well-being first and foremost. It includes the duty of the fiduciary to excuse themself from taking actions when there’s a conflict of interest with the beneficiary’s welfare.

Duty of Good Faith

This duty pertains to always acting within the law to advance the interests of the beneficiary. At no time should the fiduciary take actions that are outside of legal constraints.

Duty of Confidentiality

A fiduciary must maintain the confidentiality of all information relating to the beneficiary. They must not use any form of it, whether written or spoken, for their personal gain.

Duty of Prudence

Fiduciaries must administer matters and make decisions concerning the interests of beneficiaries with the highest degree of professional skill, caution, and critical awareness of risk.

Duty to Disclose

Fiduciaries must engage in completely forthright behavior, disclosing any and all relevant information that could have an impact on their ability to carry out their duties as fiduciary and/or on the well-being of a beneficiary’s interests.

Breaches in Fiduciary Duty

Fiduciary duties are taken on by individuals and entities for various types of beneficiaries. Such relationships include, among others, lawyers acting for clients, company executives acting for stockholders, guardians acting for their wards, financial advisers acting for investors, and trustees acting for estate beneficiaries.

An employee may even have a fiduciary duty to an employer. That is, employers have a right to expect that employees are acting in their best interests. For example, they are not sharing trade secrets, or using company equipment for private purposes, or stealing customers from a competitor.

These expectations may not be actual fiduciary duties but they may be spelled out in an employee handbook or contract clause.

Case law indicates that breaches of fiduciary duty most often happen when a binding fiduciary relationship is in effect and actions are taken which violate or are counterproductive to the interests of a specific beneficiary.

Typically, the inappropriate actions are alleged to have benefitted the fiduciary’s interests or the interests of a third party instead of a principal’s or beneficiary’s interests. In some cases, a breach stems from a fiduciary’s failure to provide important information to a client, which leads to misunderstandings, misinterpretations, or misguided advice.

Disclosure of any potential conflict of interest is important in a fiduciary relationship because any conflict can be seen as a cause for a breach of trust.

Consequences of a Fiduciary Breach

A breach of fiduciary duty can lead to a number of consequences. Not all of them are legal consequences.

1. An accusation of a breach of fiduciary duty can hurt the reputation of a professional. A client can end a professional relationship because they do not trust in a professional’s care of the required fiduciary duty.
2. If a breach of duty case proceeds to the courts, steeper consequences can result. A successful breach of fiduciary duty lawsuit can result in monetary penalties for direct damages, indirect damages, and legal costs.
3. A court ruling can also lead to industry discrediting, the loss of a license, or removal from service.

However, proving a breach of fiduciary duty is not always easy.

Elements of a Fiduciary Breach Claim

A number of legal precedents and elements have been established to allow claims by those who have been harmed by a breach of fiduciary duty. Jurisdictions differ, but in general, the following four elements are essential if a plaintiff is to prevail in a breach of fiduciary duty claim.

A Duty Existed

The plaintiff must show that a legal fiduciary duty existed. Many professionals are obligated, legally and ethically, to conduct their businesses honestly. However, that doesn’t mean that they are fiduciaries who must act solely in the interest of a particular client. A fiduciary duty is accepted as such by a fiduciary, typically in writing.

A Breach Occurred

The plaintiff must show that a fiduciary duty was breached. The type of breach varies in every case. For example, if an accountant was sloppy in filling out a client’s tax returns, and the client was slapped with an enormous fine for nonpayment, the accountant may be guilty of a breach of fiduciary duty. However, if the client was sloppy and failed to provide complete and necessary information, no breach occurred.

Damage Was Sustained

The plaintiff must show that the breach of trust caused actual damage. Without damage, there is usually no basis for a breach of fiduciary duty case. The more specific a principal or beneficiary can be with facts of damage, the better.

For example, a trustee might be sued for selling a beneficiary’s property too cheaply. If the buyer is a relative of the trustee, it’s clearly a conflict of interest. However, a specific accounting relating to the loss to the beneficiary is needed to prove a breach of fiduciary duty.

Causation Was Proved

Causation shows that any damages incurred by the plaintiff were directly linked with the actions taken in breach of fiduciary duty. In the above example of a property sale, the link appears to be clear. However, the trustee might argue that a quick sale was in the best interest of the beneficiary and that no other buyer was interested.

If you suspect your financial adviser is in breach of their fiduciary duty, you can file a complaint with FINRA, the SEC, or both. If your adviser has a professional certification, you can also notify the entity that provided the credential.

Examples of Fiduciary Breach Cases

A Duty of Loyalty

One example of a breach in fiduciary duty case went to the Virginia Supreme Court in 2007.

In “Banks v. Mario Industries of Virginia, Inc.” a lighting manufacturer and supplier sued a former employee for establishing a directly competing business by allegedly using proprietary information acquired in their previous employment.

The manufacturer did not require its employees to sign a non-compete or confidentiality clause, although the company handbook outlined related policies.

In this case, the question of whether the employees had a fiduciary duty to their former employer, and breached it, was fundamental to the appeal that brought the case to the state’s highest court.

The court affirmed the lower court’s ruling that the employees owed Mario a duty of loyalty. In effect, it supported the claim of a breach of fiduciary duty, and a penalty of more than $1 million.

A Menswear Store vs. Ex-Employees

In 2006, a high-end menswear store cited a breach of fiduciary duty when it sued two of its former sales professionals for taking a job with a competitor, Saks Fifth Avenue. The department store was able to prove that it suffered actual losses after the salesmen left.

However, the court ruled that the losses could not be attributed directly to the actions of its former employees. The suit failed.

Aiding and Abetting a Breach of Duty

A comptroller for a corporation embezzled $15 million from his employer by writing checks against his company’s bank account and depositing them into another account at his own bank.

The company sued the bank that took the deposits, alleging that it aided and abetted a breach of fiduciary duty. The court ruled that there was insufficient evidence that the bank was aware of its role in the scam.

What Does It Mean to Have a Fiduciary Duty?

The adjective fiduciary means held or given in trust. In accepting a fiduciary duty, an individual or entity accepts a legal commitment to act in the best interests of a beneficiary.

What Are the Main Fiduciary Duties?

There are several types of fiduciary duties. One is the duty of loyalty which implies that the fiduciary will always act in the best interests of the beneficiary or principal. Duty of care is another. It means that a fiduciary will take special care to make sound, sensible decisions regarding a beneficiary’s well-being. No conflicting interest will be permitted to influence the fiduciary’s actions on behalf of the client. Duty to disclose is a third. It refers to the duty a fiduciary has to disclose any conflict of interest they may have when acting on behalf of a beneficiary.

What Are Some Examples of Fiduciary Relationships?

The most common fiduciary relationships involve legal or financial professionals who agree to act on behalf of their clients. For example, a lawyer and a client have a fiduciary relationship. So do a trustee and a beneficiary, a corporate board and its shareholders, and an agent acting for a principal.

However, any individual may, in some cases, have a fiduciary duty to another person or entity. For example, an employee may be found to have a duty of loyalty to an employer and may be legally liable if they cause harm to the employer by misusing information or resources entrusted to them.

What Does It Mean to Be a Fiduciary?

A fiduciary is entrusted with the authority to act on behalf of another person or entity and has the legal and ethical obligation to act in the best interest of them. A fiduciary agrees to put a beneficiary’s interest above their own.

The Bottom Line

Fiduciary duties refer to the ways that a fiduciary is legally committed to act for a principal or beneficiary. They include a duty of loyalty, a duty of care, a duty of prudence, a duty of confidentiality, and more.

Fiduciary duties are meant to ensure that the fiduciary acts only in the best interests of a principal or beneficiary. What’s more, the fiduciary must act diligently to protect those interests.

While you should always expect a high standard of care from a fiduciary, you can protect yourself by understanding the rights that this relationship grants you and the responsibilities that are not part of a fiduciary’s duties. 

Read the original article on Investopedia.