What is a Fiduciary?

Published by Thomas Herold in Accounting, Investments, Laws & Regulations

'Fiduciary' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A fiduciary is an organization or individual which owes its trust and good faith to another person or group. It means that one party takes on the most serious legal responsibility to the other party. Fiduciaries are ethically and legally required to carry out their activities in the best interest of the other person or organization.

This could involve another’s well being, but it usually revolves around finances. People who manage another individual’s assets or finances are good examples of fiduciaries. This means that a fiduciary could be a board member, banker, accountant, money manager, estate executor, or corporate officer.

The responsibilities and duties of a fiduciary turn out to be not only ethical but also legal. After a group or individual willingly takes on such duties for another, they must carry out the tasks with the very best interests of that party at heart. This means fiduciaries have to manage any assets for the benefit of those individuals instead of to benefit themselves or realize personal gain. This level of responsibility is called a prudent person standard of care that came out of court ruling in 1830. This prudent person rule means that the individual functioning in the fiduciary’s role must always carry out the duties with the beneficiaries’ needs foremost.

Conflicts of interest are not allowed to arise between the principal and fiduciary. Per an English High Court ruling on the case of Keech versus Sandford in 1726, fiduciaries are not allowed to profit from holding such a position of trust. Because of this, the only exceptions are when the beneficiary grants specific consent when the relationship starts. When the principal gives such approval, fiduciaries are allowed to enjoy any benefits received, whether they are monetary in nature or opportunities.

Where business relationships are concerned, there are many different kinds of fiduciary duties. The most typical of these occur between trustees and their beneficiaries. There are also a number of other kinds of relationships where this can occur. Some of these are between executors and legatees, company board of directors and shareholders, stock promoters and stock subscribers, guardians and wards, investment corporations and investors, and attorneys and clients.

As the trustee and beneficiary relationship is the most common for fiduciaries, it is important to understand. Trustees handle arrangements for estates and also implement trusts. The beneficiary is the one whom they are serving. The fiduciary in this case is the person who will be the estate trustee or the trust. The beneficiary is also the principal.

In this type of arrangement, the trustee commands legal possession of the assets and/or property. The trustee is fully empowered to manage assets in the trust’s name. Because the beneficiary has equitable title of the property or asset, the trustee has to engage in best interest decisions. Such a relationship as trustee and beneficiary is critical in effective and all inclusive estate planning. This is why the trustee should be chosen with great care and thought.

Blind trusts are those where the trustee who has authority over the investment does not allow the beneficiary to be aware of the way the assets are being invested. The trustee still has the legal duty to use the prudent person conduct standard, especially because the beneficiary is unaware of what is happening. Politicians and other public figures create such blind trusts so that they can stay away from scandals involving conflicts of interest.

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The term 'Fiduciary' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.