Principal-Agent Relationship

DEFINITION of 'Principal-Agent Relationship'

An arrangement in which one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act.

BREAKING DOWN 'Principal-Agent Relationship'

The relationship between the principal and the agent is called the "agency," and the law of agency establishes guidelines for such a relationship. The formal terms of a specific principal-agent relationship are often described in a contract.

For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals' assets, in a way that will maximize returns for a given level of risk in accordance with the fund's prospectus.

RELATED TERMS
  1. Undue Influence

    A situation in which an individual is able to persuade another's ...
  2. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  3. Power Of Attorney

    A legal document giving one person (called an "agent" or "attorney-in-fact") ...
  4. Prospectus

    A formal legal document, which is required by and filed with ...
  5. Agent

    Any person who has been legally empowered to act on behalf of ...
  6. Attorney In Fact

    A person who is authorized to perform business-related transactions ...
Related Articles
  1. Entrepreneurship

    Becoming An Insurance Agent

    Few careers match the opportunity for as quick and large a paycheck as does being a life insurance agent.
  2. Home & Auto

    Key Reasons To Invest In Real Estate

    There has been a lot of negativity over the real estate sector since 2008. Here are the reasons why you should be investing in it.
  3. Home & Auto

    Do You Need A Real Estate Agent?

    There's no guarantee that realtors will act in your best interest, but it may be worth hiring one anyway.
  4. Budgeting

    Consulting - Everybody's Doing It, Should You?

    Fancy yourself a problem solver? Management consulting might be right for you.
  5. Entrepreneurship

    Stop Scams In Their Tracks

    Find out how to protect yourself and your loved ones from financial fraudsters.
  6. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  7. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  8. Personal Finance

    How the Green Card Lottery Really Works

    Here's how the popular green card lottery, run by the U.S. State Department, operates, including some tips on improving your odds of winning.
  9. Retirement

    Smart Ways to Tap Your Retirement Portfolio

    A rundown of strategies, from what to liquidate first to how much to withdraw, along with their tax consquences.
  10. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
RELATED FAQS
  1. What are the responsibilities of the principal in a company?

    Principals have different roles depending on the nature of an individual business, but the universal responsibility of a ... Read Full Answer >>
  2. What are some examples of fiduciary duty?

    Under the U.S. legal system, a fiduciary duty is the legal term describing the relationship between two parties that obligates ... Read Full Answer >>
  3. What's the difference between a Nasdaq market maker and a NYSE specialist?

    What's the main difference between a specialist and a market maker? Not much. Both the New York Stock Exchange (NYSE) specialist ... Read Full Answer >>
  4. Who employs the specialists at New York Stock Exchange (NYSE)? Do they work for themselves, ...

    Before we address this question, let's review what specialists do. Specialists are people on the trading floor of an exchange, ... Read Full Answer >>
  5. What is the Writ of Mandamus?

    A writ of mandamus is a court order issued by a judge at a petitioner’s request compelling someone to execute a duty he is ... Read Full Answer >>
  6. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center