Fiduciary Duty: What It Means

While it may seem like a given, one cannot simply assume that a financial advisor always acts in the best interests of the client. This ambiguity lays the groundwork for what is known as fiduciary duty. While it is often associated with financial advisors, many professions can have a fiduciary duty. For example, attorneys, real estate agents and power of attorney representatives can also assume the role of fiduciary.

There are several types of fiduciary relationships. You should choose a financial advisor who abides by the fiduciary’s rules. In doing so, you’ll have the best chance of working with a financial advisor who will work in your best interests.

What does fiduciary duty mean?

A fiduciary duty is an ethical or legal relationship of trust between two or more parties. Generally, the fiduciary must act in the best interests of the other party. Depending on the type of fiduciary, they can be the result of a contract, which is often the case with attorneys, accountants and financial advisors. Other fiduciaries, such as executors, guardians and trustees may be required by law to accept a fiduciary duty.

Fiduciaries must act with the highest loyalty, honesty and care to protect the beneficiary’s best interests. While many types of fiduciary relationships exist, this basic principle always applies.

5 types of fiduciary duty

Depending on the contract or law that requires fiduciary duty, there may be different types of obligations the fiduciary must assume:

1. Duty of care: As a fiduciary, your financial advisor should carefully review all the information presented to them. They must do their best to avoid missing any important details.
2. Duty of loyalty: A fiduciary is on your team. Their responsibility is to be on your side and act in a way that benefits you, not them or their employer.
3. Duty of disclosure: No one likes it when someone keeps important information a secret. The fiduciary should keep you informed of any details that would affect your decisions.
4. Duty of confidentiality: You also may not want your financial advisor talking about your business around town. As a fiduciary, they must keep your interactions private.
5. Duty of good faith: Perhaps your financial advisor wants to go above and beyond, but the law is still the law. As a fiduciary, they must do things by the book.

Fiduciary duties are important because they protect the interest of vulnerable clients. Without these responsibilities, the beneficiary may not be confident in the relationship.

Examples of a fiduciary relationship

Many types of work relationships may require a fiduciary duty. Here are some of the most common examples of fiduciary relationships:

A trustee and beneficiary of a trust

When creating a trust, a trustee names a beneficiary who will receive the assets in the trust at the appropriate time. However, as a fiduciary, the trustee must make decisions that are in the beneficiary’s best interests.

A guardian and ward

In this relationship, an adult (the guardian) becomes the legal guardian of a child (the ward). The guardian must ensure the child is well cared for and has everything they need in their daily life. For example, the child should have a safe, secure home and have regular checks from a doctor.

An attorney and client

An attorney must always act in the client’s best interests, including maintaining attorney/client privilege. The attorney should act fairly, be loyal, act with care and always prioritize the client’s interests.

A real estate agent and client

The real estate agent must act honestly, fairly and in the best interests of their client at all times. The agent must also keep all information confidential and disclose any potential conflicts of interest. They must also act in the client’s best interests even if that decision would be to the agent’s disadvantage. They should also use their knowledge and skills to serve the client and avoid causing harm.

A financial advisor and client

A financial advisor should always prioritize the client’s interests. The most basic example of this is when making investment recommendations. The financial advisor should not lead the client toward investments that would earn a higher commission for them or their employer. Instead, they should make recommendations that lead to the best outcome for the client.

What is a breach of fiduciary duty?

A breach of fiduciary duty refers to a fiduciary’s failure to act in the client’s best interests. There are many ways that a fiduciary might breach their duty. For example, a fiduciary might:

• Make a decision that is not in their client’s best interests
• Use their position of trust to benefit themselves or their employer
• Fail to disclose important information to their client

If fiduciaries breach their duty, they may be liable for damages. The damages may be awarded to the client or to the government. In some cases, the fiduciary may be subject to criminal penalties.

How does fiduciary duty impact financial advisors?

Fiduciary duty is a legal obligation to act in the best interests of the client. When a financial advisor has a fiduciary duty, they must put their client’s best interests first when making certain decisions, such as investment selections. For instance, they may not recommend investments that earn them a higher commission, or any that make more money for their employer. This scenario would represent a potential breach of fiduciary duty.

There are several other ways in which fiduciary duty impacts financial advisors. First, financial advisors must be transparent with their clients about their fees and commissions. Second, it requires them to provide detailed information about each investment’s risks and potential rewards. Third, it requires them to obtain informed consent from their clients before making any investment decisions. Failure to perform any or all of these responsibilities may represent a breach of fiduciary duty.

Choosing a fiduciary financial advisor

When choosing a financial advisor, it is important to choose a financial advisor who upholds the duties of a fiduciary. A financial advisor can help you with many key financial matters, such as managing investments, saving for a home, planning for retirement and tax planning. When making such critical decisions, it’s important to have someone who is on your side. That’s why finding the right financial advisor who will have your best interests in mind is so important.

When looking for a fiduciary or a financial advisor, try taking these steps:

1. Determine your financial needs. Do you need help with taxes, investment or retirement planning? Narrow down your needs to get the best help.
2. Find the right person for the job. Numerous credentials exist, such as CPA, CFP and ChFC. Make sure the person you hire offers the services you need.
3. Check their registration. It’s generally a good idea to verify your financial advisor’s credentials by using databases such as BrokerCheck and Investor.gov.
4. Read reviews and testimonials. A financial advisor may be good at selling their services, but results are what matters most. Read reviews online to understand the experiences of past clients.
5. Check their fees. Financial advisors may have different fee structures, such as a flat rate or an assets under management fee. Though the differences might seem small, they can make a big difference over time.

FAQs

• How do fiduciaries get paid?
  

  Fee structures vary, but fiduciaries generally generally charge an hourly or annual fee, or they may charge a percentage of assets under management. Double-check that the advisor’s fees are within your budget.

• Is Charles Schwab a fiduciary?
  

  Charles Schwab may serve as a fiduciary when providing guidance to its clients. For instance, Schwab maintains a fiduciary duty when managing trusts. The same is true in the management of retirement accounts.

• What is the downside of using a fiduciary?
  

  There are many benefits to using a fiduciary, but there can sometimes be downsides. For instance, a fiduciary may charge fees, which you can potentially avoid if you self-manage your accounts. Depending on how active the fiduciary’s role is, you might have less control over your investments and other accounts than you would when self-managing.

• How do you tell if someone is a fiduciary?
  

  It isn’t always obvious when someone is a fiduciary. They might advertise it on their business page, but often the easiest way to find out is by asking them directly. You can also do your due diligence by verifying their credentials and registration with tools like BrokerChecker or the Investor.gov website.

Bottom line

Fiduciary duty is a legally binding responsibility of a professional to act in the client’s best interests. If they have agreed to act as a fiduciary, they cannot act in the best interests of themselves or their employer. This can apply to financial advisors, attorneys, real estate agents or other working relationships.

The key to upholding a fiduciary duty is to be on the side of the person they have agreed to help. It requires the fiduciary to be transparent and disclose all important information while making the best decisions for the person they are helping. If you aren’t sure someone is a fiduciary, the best way to find out is to ask directly.