Fiduciary Duty
What does Fiduciary Duty mean?
Fiduciary duty is the legal responsibility to act in the best interest of another party. Within this relationship the fiduciary obligation requires the acting party or fiduciary to exercise their responsibilities with care, diligence, skill, and intelligence. The fiduciary’s actions must be for the benefit of their client and cannot, in any way, be for their own personal gain.
All actions taken by the fiduciary are for a limited time and purpose. The assets managed by the fiduciary do not become the property of the fiduciary. Rather the fiduciary has simple agreed to manage them for a specific time within the fiduciary relationship.
Although the powers of the fiduciary relationship may be established through a formalized legal process, including a document, laws, or state and federal regulations, they may not always be legislated or formalized.
Who is considered a fiduciary?
A fiduciary can be any person, organization, or committee who has accepted the legal responsibility to manage or control the financial assets of another person or group. For example, those with fiduciary responsibilities can include investment managers managing pension plans, banks performing services for their client base, parents managing a child’s assets, or a lawyer managing their client’s finances.
What are the responsibilities of the fiduciary?
Fiduciaries have two main objectives: to provide services through loyalty and with the necessary duty of care. Loyalty ensures the fiduciary acts in the best interest of their client, which means they do not gain any direct benefit from the relationship at the expense of their client. Duty of care requires the fiduciary to maintain the highest level of skill, thoughtfulness, and competence, as they discharge their duties. Skills needed are often dictated by industry standards.
For example, fiduciaries managing an employee benefit plan must follow the standards outlined in the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, the fiduciary must act in the best interests of the plan and its participants.
Failing to seek qualified advisers and managers for advice when the fiduciary lacks the expertise needed to make sound decisions can be considered a breach of fiduciary duty.
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