What is a Fiduciary Duty?

Definition: A fiduciary duty is a legal obligation of loyalty and care of someone else’s assets. It is a legal term that implies commitment to act in the best interest of another individual.

What Does Fiduciary Duty Mean?

The fiduciary is the person who owes the duty to the beneficiary, also referred to as the principal. When accepting a fiduciary duty, a person or organization accepts to temporarily own and administer the assets or equity of another person. He also accepts the duties of loyalty and/or of care. Two parties agree to have a fiduciary relation with the purpose of get the best out the assets involved.

The fiduciary is assumed to make better decisions that the beneficiary would make, due to his higher expertise, skills, or diligence. He also takes care of the assets without taking any profit or benefit for himself that was not previously agreed. In this regard, no conflict of interest must be present when a person accepts this kind of duty. Trust-based relationships and honesty are key elements in this type of relationships. In business, fiduciary duties are present in many forms. One example is an attorney that has a fiduciary duty when acting on behalf of his client, in this case a given company.

Example

Sheila Hans is a young woman who recently inherited almost three million dollars from a single aunt. She dedicates her life to four kids and has no experience to deal with financial and investment matters. Sheila knew a financial expert who was also a close friend of her family so she decided that he would be an excellent fiduciary.

This person accepted the fiduciary duty and both parties signed a fiduciary agreement based on trust and care. The fiduciary will have decision-making powers to invest the money according to his knowledge and skills and in the event of Sheila’s unexpected death all the assets will be returned to her kids if and when they are over 20 years old.