A Fiduciary is a professional individual or organisation with a duty to act in the best interests of a client. This usually means acting in the client’s financial interests, but can also mean acting to ensure the general wellbeing of a client. Particularly if the fiduciary is acting in the interests of a child or otherwise vulnerable client.
UK Law states that “Fiduciaries are required to act openly and honestly, and must not (without the informed consent of the other person) place themselves in a position where their own interests or their duty to another party may conflict with their duty to pursue the other person’s interests”. Under UK law, a fiduciary cannot profit or benefit financially from their relationship with a beneficiary or client (collectively known as the ‘principal’). They have a legal obligation to account for any unauthorised profit that they may obtain as a result of their position.
Fiduciary duty explained
Fiduciary duty encompasses the duties that professionals or organisations owe to their clients when acting as fiduciary. The primary duty is that of loyalty. Fiduciaries must act in the best interests of their clients and put the client’s interests before their own. This is why fiduciaries cannot profit from their relationships. This includes a duty to ensure that there are no conflicts of interest between themselves and their principal. Any benefit for the fiduciary represents a breach of their duty.
Fiduciaries also have a duty of care, ensuring that they carefully review all pertinent information to ensure that they make the most informed decisions on behalf of their principal.
Examples of fiduciary relationships
There are numerous fiduciary relationships in the realm of business, investment and financial planning.
Trustees and beneficiaries
The most common example is in estate management. The relationship between a trustee and a beneficiary is a fiduciary relationship. When a trustee of an estate is nominated, they act as the fiduciary, with the beneficiary as the principal.
Here, the fiduciary has legal ownership of the assets that comprise the estate and make decisions in managing the estate that are in the best interest of the beneficiary.
Companies and their shareholders
Publicly traded LLCs have a duty of care to act in the best interests of their shareholders. Company directors and board members have a fiduciary duty to act in good faith, making decisions that will benefit the company and its shareholders. This means that no personal interests or affiliations can be prioritised over the interests of the shareholders. Conflicts of interest act as a breach of this duty and individual board members can be made legally accountable by the company or its shareholders.
An investment fiduciary is any individual or organisation who is responsible for how another individual or company’s money is invested. For instance, members of a company or charity’s investment committee will have a fiduciary duty to ensure that investment is to the benefit of the organisation.
A financial advisor, investment broker or wealth management firm does not necessarily have a fiduciary duty as they receive a fee or payment on commission for their services. However, they do have a suitability obligation as defined by the FCA to ensure that financial instruments and investment-based products are suited to the investor’s needs and goals.
What is a fiduciary relationship?
A fiduciary relationship is where an individual or organisation has a legal responsibility to act in a way that benefits its principal. This can be a solicitor’s client, the beneficiary of a trust or a shareholder in a company.
Is a fiduciary a financial advisor?
While financial advisors can act in a fiduciary capacity, a fiduciary is not necessarily a financial advisor. It can be any individual with a duty to act in the best financial or personal interests of another party.
What’s the difference between fiduciary duty and suitability obligation?
A suitability obligation applies to fee-based and commission-based professionals like broker-dealers. It means only that they must find and promote investments that are suitable for the client’s needs and goals. It does not preclude them from profiting from the relationship in the same way a fiduciary duty does.