Fiduciary

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DEFINITION of 'Fiduciary'

A fiduciary is responsible for managing the assets of another person, or of a group of people. Asset managers, bankers, accountants, executors, board members, and corporate officers can all be considered fiduciaries when entrusted in good faith with the responsibility of managing another party's assets. 

BREAKING DOWN 'Fiduciary'

A fiduciary's responsibilities are both ethical and legal. When a party knowingly accepts a fiduciary duty on behalf of another party, they are required to act in the best interest of the party whose assets they are managing. The fiduciary is expected to manage the assets for the benefit of the other person rather than for his or her own profit, and cannot benefit personally from their management of assets. This is what is known as a prudent person standard of care, a standard that originally stems from an 1830 court ruling. This formulation of the prudent-person rule, required that a person acting as fiduciary was required to act first and foremost with the needs of beneficiaries in mind, and that they must work to preserve the estate or corpus of a trust, as well as the amount and regularity of income. 

Types of Relationships

While the most common types of fiduciary relationships are between a trustee and a beneficiary, fiduciary duties appear in a wide variety of common business relationships. 

The way the relationship between a trustee and beneficiary would work is that the trustee, while legally owning property or assets, is bound by both equity and their fiduciary duty to manage the assets in accordance with the best interests of the beneficiary. A similar fiduciary duty can be held by corporate directors, seeing as they can be considered trustees for stockholders if on the board of a corporation, or trustees of depositors if service as director of a bank.

Politicians often set up blind trusts in order to avoid conflict of interest scandals. A blind trust is relationship in which a trustee is in charge of the investment of a beneficiary's corpus without the beneficiary knowing how the corpus is being invested. Even while the beneficiary has no knowledge, the trustee has a fiduciary duty to invest the corpus according to the prudent person standard of conduct. 

Other types of relationships where fiduciary duties are involved include:

  • Lawyers and clients
  • Executors and legatees
  • Guardian and ward
  • Investment corporations and investors
  • Promoters and stock subscribers

Regulation

The Department of the Treasury's agency, the Office of the Comptroller of the Currency is in charge of regulating federal savings associations and their fiduciary activities. Multiple fiduciary duties may at times be at conflict with one another, a problem that often occurs with real estate agents and lawyers. Two opposing interests can at best be balanced; however, balancing interests is not the same as serving the best interest of a client. 

A fiduciary cannot profit from their position, according to an English High Court ruling, Keech vs. Sandford (1726). All profits made by the fiduciary as result of their position must be reported to the principal, and if the principal provides consent, then the fiduciary can keep whatever benefit they received. These benefits can be either monetary or defined more broadly as an "opportunity."

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