What is Fiduciary Duty?
Fiduciary duty is the responsibility that fiduciaries are tasked with when dealing with other parties, specifically in relation to financial matters. In most cases, it means that the duties involve a fiduciary overseeing the wealth of their clients, acting on the client’s behalf, and in their best interests.
What is a Fiduciary?
To better understand fiduciary duty, it’s first important to know what a fiduciary is. A fiduciary holds ethical and legal responsibilities to his clients – a relationship that requires trust and prudence on the part of the fiduciary. Clients often entrust a significant amount of wealth to a fiduciary, whether it’s in the form of cash or other assets.
Part of the fiduciary’s role is to act, always and first and foremost, in the best interest of his clients. In most cases, fiduciaries should not reap any direct financial gain from any of the decisions they make or the actions they take on behalf of their clients. If they do, it should be only with full consent from the client.
Examples of Fiduciary Relationships
A fiduciary relationship is the one between the fiduciary and the beneficiary or client. Some examples of fiduciary relationships are listed below:
- Brokers and principals
- Trustees and beneficiaries
- Attorneys and clients
Not all fiduciary roles are served in relation to financial obligations. An attorney, for example, may or may not be caring for an individual’s financial assets when acting in their fiduciary capacity.
In every type of fiduciary/client relationship, it’s the fiduciary’s duty to act in a way that best serves his client. That means not entering into any other relationships that would result in a conflict of interest, making a plan of action with the client to ensure the client’s desired outcome is achieved, keeping the client updated on any happenings and/or changes, and being available to answer questions or resolve issues as they arise.
A classic example of violating one’s fiduciary duty would be a financial advisor who steers a client toward making investment “A” even though the fiduciary is aware that investment “B” is more likely to generate the best return on investment – simply because the fiduciary will earn a large commission from convincing the client to invest in investment A. In such a scenario, the fiduciary is putting their own best interest ahead of the best interest of their client.
Fiduciary Duty – An Obligation of Respect
Fiduciary duty is one of the highest and most respected obligations. Fiduciaries are paid to work. However, they are also tasked with the responsibility of being the eyes and ears of their client, working to secure the client’s desired outcomes without any promise of additional compensation for doing so.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: