Fiduciary Duty: Definition, Classification, and Examples

What Is a Fiduciary Duty?

A person with a fiduciary duty accepts legal responsibility for obligations like care, loyalty, good faith, confidentiality, and more, all while serving the best interests of a beneficiary. A fiduciary duty refers to the relationship between the fiduciary and the beneficiary or principal for whom the fiduciary acts on behalf of. Extreme care must be taken to ensure no conflicts of interest arise that could harm those interests.

• A fiduciary duty involves actions taken for the best interest of another person or entity.
• It describes a relationship between an attorney and a client or a guardian and a ward.
• It includes the duties of care, loyalty, good faith, confidentiality, prudence, and disclosure.
• Successful arguments have been made that an employee may have a fiduciary duty of loyalty to their employer.
• A breach of fiduciary duty occurs when the fiduciary fails to act responsibly in the client's best interest.

Examples of Fiduciary Relationships

Trustee/Beneficiary

A single parent of a young child might establish a living trust to manage the assets their child will inherit if the parent dies while the child is still a minor. The parent would appoint a person or an entity, such as a law firm or a bank, to serve as the trustee. This person or entity has a fiduciary duty to the child, who is the beneficiary of the assets.

The trustee has legal ownership of the property and controls the assets held in the trust in a trustee/beneficiary relationship. As the fiduciary, the trustee must make decisions that are in the best interest of the beneficiary, who has legal ownership of the property. The relationship between a trustee and a beneficiary is a critical aspect of comprehensive estate planning. Special care should be taken when determining who will be designated as a trustee.

Guardian/Ward

An adult is designated as the legal guardian of an underage child in a guardian/ward relationship. In their role as fiduciary, the guardian is responsible for ensuring that all matters related to the child's daily well-being are addressed responsibly and in the child's best interest. This care can include deciding where the child will attend school, arranging for medical care, and providing an allowance.

A guardian might be appointed by a state court when parents pass away or are unable to care for a child for other reasons. The guardian/ward relationship remains in effect in most states until the child reaches adulthood.

Agent/Principal

Any individual, corporation, partnership, or government agency can be referred to as an agent who is free of conflicts of interest to act on behalf of a principal. A common example of an agent/principal relationship is between corporate executives and shareholders. Shareholders expect that executives will make well-considered and prudent decisions on their behalf and in their best interest as owners.

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

Attorney/Client

The agreement between an attorney and a client is perhaps one of the most stringent fiduciary relationships. The U.S. Supreme Court has stated that there must be the highest degree of trust and confidence between an attorney and a client. As the fiduciary, the attorney must act fairly, loyally, with care, and within the scope of the law on behalf of the client.

An attorney can be sued by a client for a breach of their fiduciary duty. They are answerable to the court where the client is represented when a breach occurs.

Controlling Shareholder/Company

A fiduciary duty may be required of a shareholder in some circumstances when they hold a majority of the shares in a company or control the company's operations. A breach of fiduciary duty can lead to personal liability for the controlling shareholder as well as for the company's directors and officers.

The adjective "fiduciary" means something that is held or entrusted in confidence. A fiduciary undertakes to act in the best interests of a principal or beneficiary.

Types of Fiduciary Duties

A fiduciary duty can vary depending on the type of beneficiary the fiduciary serves. However, the legal and ethical obligations associated with protecting the beneficiary's interests typically include the following duties:

Duty of Care

This is the fiduciary's responsibility to fully inform themselves to make reasonable decisions that protect the beneficiary's interests. It can involve carefully considering options and making reasonable decisions based on a careful review of available information.

Duty of Loyalty

This involves acting in the best interest of the beneficiary at all times, putting their interests first. It includes the fiduciary's obligation to recuse themselves from any action where there is a conflict of interest with the beneficiary's interests.

Duty of Good Faith

This duty involves always acting within the scope of the law to promote the beneficiary's interests. It is never permissible to act outside of legal limits.

Duty of Confidentiality

The fiduciary must maintain the confidentiality of all information related to the beneficiary. They must not use any form of information, whether written or verbal, for their personal gain.

Duty of Prudence

The fiduciary must manage and make decisions related to the beneficiary's interests with the highest degree of professionalism, care, and awareness of risk.

Duty of Disclosure

The fiduciary must act in a completely honest manner. They must disclose all relevant information that might affect their ability to perform their fiduciary obligations or that affects the beneficiary's interests.

Breach of Fiduciary Duty

Fiduciary duties are assumed by individuals and organizations to a wide variety of beneficiaries. These relationships include attorneys acting on behalf of clients, corporate executives acting on behalf of shareholders, guardians acting on behalf of wards, financial advisors acting on behalf of investors, and trustees acting on behalf of trust beneficiaries.

Employees can also have a fiduciary duty to their employers. Employers have a right to expect that an employee is acting in their best interest. They don't share trade secrets, use company equipment for personal gain, or steal clients for a competitor.

These expectations may not be true fiduciary duties, but they may be spelled out in an employee handbook or contractual terms.

Case law suggests that a breach of fiduciary duty typically occurs when a binding fiduciary relationship is in effect and actions are taken that violate or harm the interests of a specific beneficiary. Inappropriate actions are often alleged to have benefited the fiduciary or the interests of a third party rather than the interests of the principal or beneficiary.

A breach can stem from the fiduciary's failure to provide important information to a client in some instances. This leads to misunderstandings, misinterpretation, or bad advice.

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

Consequences of a Breach of Fiduciary Duty

A breach of fiduciary duty can lead to various consequences. Not all are legal consequences.

An allegation of a breach of fiduciary duty can be damaging to a professional's reputation. Clients can terminate a professional relationship because they don't trust the professional to exercise the necessary care with their fiduciary obligations.

More severe consequences can ensue if a breach of duty case goes to court. A successful lawsuit for a breach of fiduciary duty can lead to fines for direct damages, indirect damages, and legal costs.

A court ruling can also result in a loss of industry credibility, a loss of a license, or removal from service.

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

Elements of a Fiduciary Duty Breach Claim

Numerous legal precedents and elements have been established to allow for claims from those harmed by a breach of fiduciary duty. Jurisdictions vary, but the following four elements are typically essential if the plaintiff is to prevail in a lawsuit for a breach of fiduciary duty.

The Duty Existed

The plaintiff must prove that a fiduciary relationship and legal duty existed. Many professionals have a legal and ethical duty to conduct their business honestly, but this doesn't necessarily mean that they are a fiduciary who must act in the sole interests of a specific client. A fiduciary duty is accepted by a fiduciary, often in writing.

A Breach Occurred

The plaintiff must prove that a fiduciary duty was breached. The type of breach can vary. An accountant can be seen to have breached their fiduciary duty if they are negligent in preparing a client's tax return and the client is fined a large sum for non-payment. But no breach occurs if the client was negligent and failed to provide complete and necessary information.

Damages Occurred

The plaintiff must prove that the breach of trust caused actual damages. There is typically no basis for a lawsuit for a breach of fiduciary duty without damages. The more specific the principal or beneficiary can be in providing facts and evidence of damages, the better.

The fiduciary can be sued for selling the beneficiary's property too cheaply. This is a clear conflict of interest if the buyer is a relative of the fiduciary. A detailed statement related to the beneficiary's loss is necessary to prove a breach of fiduciary duty.

Causation Is Proven

Causation suggests that any damages the plaintiff suffered are directly related to the actions taken in a breach of fiduciary duty. In the case of the property sale, the connection seems obvious, but the fiduciary could argue that a quick sale was in the beneficiary's best interest and there were no other interested buyers.

You can file a complaint with FINRA, the SEC, or both if you suspect your financial advisor breached their fiduciary duty. You can also notify the organization that issued a professional certification if your advisor has one.

Examples of Fiduciary Duty Breaches

Duty of Loyalty

This example of a breach of fiduciary duty was brought before the Virginia Supreme Court in 2007.

A manufacturer and supplier of lighting fixtures sued a former employee in the case of "Banks v. Mario Industries of Virginia, Inc." They alleged that the employee started a competing business using proprietary information they had acquired during their previous employment.

The manufacturer did not require the employee to sign a non-compete agreement or a confidentiality clause, but the company's handbook spelled out relevant policies. The question of whether the employees owed a fiduciary duty of loyalty to their former employer and breached it was the focus of 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. This effectively supported the claim for a breach of fiduciary duty and imposed a fine of more than $1 million.

Men's Fashion Store vs. Former Employees

A high-end men's fashion store cited a breach of fiduciary duty in 2006 when it sued two of its former salespeople for taking jobs with a competitor, Saks Fifth Avenue. The store demonstrated that it suffered actual damages after the salespeople left. The court ruled that the damages could not be attributed directly to the former employees' actions, and the lawsuit failed.

Aiding and Abetting a Breach of Duty

A controller for a corporation embezzled $15 million from their employer by writing checks from the company's bank account and depositing them in another account at their personal bank. The company sued the depositary bank, alleging that the bank aided and abetted a breach of fiduciary duty. The court ruled there was not enough evidence that the bank had knowledge of its role in the scam.

What Does Fiduciary Duty Mean?

The adjective "fiduciary" implies that something is held or entrusted in confidence. An individual or entity accepts a legal commitment to act in the best interests of a beneficiary when they accept a fiduciary duty.

What Are the Primary 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.

The duty of care is another. This means that the fiduciary will exercise special care to make reasonable and informed decisions related to the beneficiary's welfare. No conflicts of interest should be allowed to influence the fiduciary's actions on behalf of the client.

The duty of disclosure is a third. It relates to the fiduciary's obligation to disclose any conflicts 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. An attorney and a client have a fiduciary relationship. Similarly, a trustee and a beneficiary, a corporate board and shareholders, and an agent acting on behalf of a principal.

Any individual can have a fiduciary duty to another person or entity in some circumstances. An employee may be seen to have a duty of loyalty to their employer and can be held liable if they cause damages to the employer by misusing information or resources that were entrusted to them.

What Does It Mean to Be a Fiduciary?

A fiduciary is entrusted with the power to act on behalf of another person or entity and has a legal and ethical obligation to act in their best interests. The fiduciary agrees to place the beneficiary's interests above their own.

Conclusion

A fiduciary duty refers to the way a fiduciary is legally committed to acting in the interests of a principal or beneficiary. They include the duties of loyalty, the duty of care, the duty of prudence, and the duty of confidentiality.

Fiduciary duties are established to ensure that a fiduciary acts only in the best interests of the principal or beneficiary. The fiduciary must act with diligence to protect those interests.

You should always expect a high standard of care from a fiduciary, but you can also protect yourself by understanding the rights that this relationship provides and the responsibilities that fall outside of the fiduciary's obligations.