What Is a Fiduciary Duty?

In some situations, a person in a position of trust must put the interests of another first.

When your lawyer or accountant assures you, “I have only your best interests in mind,” you’re not just getting a throw-away line. Instead, that person is articulating his or her legal duty when it comes to advising you and handling your affairs: The speaker is your fiduciary, a person entrusted with the responsibility of making important decisions on your behalf. Each decision made by the fiduciary must be in your best interests and carried out in a loyal and honest manner. This responsibility is called a “fiduciary duty.”

The fiduciary duty is the gold standard when it comes to the depth of fidelity that an advisor owes his or her advisee. It applies only in certain situations, such as when a close relationship exists, or when one party has access to relevant confidential information. Here are a few situations that give rise to fiduciary obligations:

  • a parent or social worker to a child (close relationship, plus the natural advantage of the adult)
  • a spouse to another spouse (a particularly close relationship)
  • a doctor to a patient (the doctor has specialized knowledge not available to most patients), and
  • an attorney to a client (again, the attorney understands the law and the ramifications of certain actions in ways that most clients do not).

In each of the above examples of fiduciary relationships, two aspects are common to all:

  • Trust. In each instance, the fiduciary is in a unique position of trust. For example, a senior citizen with diminished abilities, or a young dependent child, must rely on the fiduciary to make sound decisions. Similarly, clients might depend on their lawyer’s ability to analyze a complicated situation and recommend the best course of action.
  • An imbalance of knowledge. In addition, fiduciaries typically have superior knowledge or abilities. Despite the ease of consulting the Internet with any and all questions, some solutions can’t be accomplished by a search and a click. We often rely on highly trained individuals to understand our unique situations and advise us accordingly.

Vulnerability in the Fiduciary Relationship

As a result of the two factors mentioned above, in most situations, the individual who relies on the fiduciary isn’t in a position to recognize, let alone defend against, a failure of the fiduciary to live up to his duty. For this reason, the law will step in.

Example. When Henry stepped in to manage his elderly mother’s care and finances, he understood that he was responsible for making choices that were in her best interest. For instance, if his mother required in-home care, paying that expense by drawing on her retirement would likely be fine. By contrast, withdrawing funds to buy himself a new car, or to invest in a speculative shipwreck recovery business, would probably be a breach (violation) of his fiduciary duty.

Fiduciary Duties in Business

Fiduciary duties exist in the business world in ways other than investments. Partners in a partnership have an obligation to conduct transactions in the best interest of the business—not in a manner benefiting the individual. The same holds true for a corporation. To satisfy their fiduciary duty, corporate directors and officers must make decisions that put the interests of the shareholders before personal gain.

Although it might seem easy to spot a fiduciary duty, it isn’t always as straightforward as you would expect. For instance, state law might not recognize a fiduciary relationship between a majority and minority member of a limited liability company (LLC), even though the relationship is similar to that which arise in a partnership or corporate relationship.

Bankruptcy and Fiduciary Duties

Bankruptcy allows debtors to discharge most, but not all, debts. The nondischargeable debts are big-ticket items that the government has decided can’t be walked away from: Tax liens, past-due child support, and (you guessed it), a debt resulting from a breach of a fiduciary duty. Be aware, however, that before a debt would qualify for such treatment, the creditor must prove the violation in court.

Fiduciary Duties Are Here to Stay—Or Are They?

Once the law establishes the existence of a particular fiduciary relationship, it’s unlikely to reverse that position—but it can happen. You might think that it’s practically a no-brainer to impose a fiduciary duty on a financial advisor. But not all would agree with the wisdom of this rule. For an example of an attempt to undo a finding of fiduciary duty, read Trump Administration Memorandum: Fiduciary Duty Shouldn’t Extend to Financial Advisors.

When to Seek Legal Advice

Because it’s not always clear whether a fiduciary duty exists in a particular situation, you shouldn’t assume that a duty exists without verifying that fact through legal research. If you aren’t comfortable doing so yourself, you should consult with a knowledgeable attorney (especially if you’re considering filing a lawsuit alleging a breach of fiduciary duty).

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