In legal terms, a fiduciary is an individual or organization that has taken on the responsibility of acting on behalf of another person or entity with utmost honesty and integrity. For example, bankers, attorneys and officers of public companies are all fiduciaries, meaning they must act in the best interest of their customers, clients or shareholders. If they don’t, they are legally liable. Similarly in the investment world, fiduciary financial advisors manage client assets with the clients’ best financial interests in mind. Therefore, be sure to limit your search for a financial advisor to only fiduciary advisors in your area.
What Is a Fiduciary?
The term “fiduciary” is a good word to hear when you’re searching for a financial advisor. An advisor that calls themselves a fiduciary seeks to minimize conflicts of interest, be transparent and live up to the trust placed in them. Fiduciary financial advisors must:
- Put their clients’ best interests before their own, seeking the best prices and terms.
- Act in good faith and provide all relevant facts to clients.
- Avoid conflicts of interest and disclose any potential conflicts of interest to clients.
- Do their best to ensure the advice they provide is accurate and thorough.
- Avoid using a client’s assets to benefit themselves, such as purchasing securities for their own account before buying them for a client.
Fiduciary usually refers to someone who manages assets on the behalf of an individual, a family, a company or any other entity. In addition to a banker or financial advisor, this person could be an accountant, executor, trustee or board member. In theory, a fiduciary can be anyone to whom you delegate your personal, legal or financial choices.
What Is Fiduciary Duty?
Fiduciary duty is a legal responsibility to put the interests of another party before your own. If someone has a fiduciary duty to you, he or she must act solely in your financial interests. A fiduciary cannot, for example, recommend a strategy that doesn’t benefit you but instead provides a kickback. You can think of it like the doctor-patient relationship, where one party has a duty to provide the best care it can to the other party.
Fiduciary duty is important for guiding the actions of the professionals who deal with clients’ money. It’s also important because, when violated, it provides an avenue for legal action. If a financial professional who isn’t a fiduciary has been knowingly selling you low-performing, high-fee investments, you don’t have the legal standing that you would have if the professional were a fiduciary.
A breach of fiduciary duty occurs when a fiduciary fails to honor his or her obligation. A breach could happen if a fiduciary benefits from his or her recommendations, fails to provide proper guidance or acts in any way that’s adverse to your best interests. Examples include:
- Account churning (making an excessive number of trades to make commissions)
- Misrepresentation (making a false statement about a security transaction)
- Making unauthorized trades
- Acting negligently
Fiduciaries can be held financially and civilly responsible for any actions they make that are not in your best interest. You are entitled to damages even if you don’t incur harm.