A fiduciary is a person or organization that has a legal and ethical obligation to act in the best interests of another person. Fiduciary relationships arise in many contexts including estate planning, financial advising, and healthcare decision making. Understanding what a fiduciary is and when fiduciary duties apply can help you make better decisions about who to trust with important responsibilities.
What fiduciary duty means
When someone has a fiduciary duty to another person they are legally required to:
- Act in the other person’s best interests rather than their own
- Be honest and transparent in all dealings
- Avoid conflicts of interest or disclose them fully when they cannot be avoided
- Keep the other person’s information confidential
- Act with care, skill, and diligence in carrying out their responsibilities
A fiduciary who violates these duties can be held legally liable for any harm caused by the breach. This is a higher standard of care than is required in most ordinary business relationships.
Common fiduciary relationships in estate planning and elder care
Fiduciary relationships arise frequently in estate planning and elder care contexts including:
- Executor — the person named in a will to manage the estate after the testator’s death has a fiduciary duty to the estate’s beneficiaries. The executor must manage estate assets prudently, pay debts and taxes, and distribute assets according to the will.
- Trustee — the person or organization managing a trust has a fiduciary duty to the trust’s beneficiaries. The trustee must manage trust assets prudently, follow the terms of the trust document, and act in the beneficiaries’ best interests.
- Agent under power of attorney — the person named as agent in a power of attorney has a fiduciary duty to the principal. The agent must act in the principal’s best interests and cannot use the principal’s assets for their own benefit.
- Guardian or conservator — a person appointed by a court to manage the affairs of an incapacitated person has a fiduciary duty to the person under their care.
- Healthcare agent or proxy — the person named in a healthcare power of attorney to make medical decisions has a duty to act in accordance with the principal’s known wishes and best interests.
Fiduciary financial advisors
In the financial services industry not all advisors are held to a fiduciary standard. Understanding the difference can be important when choosing a financial advisor:
- Fiduciary advisors — are legally required to act in their client’s best interests when providing advice. They must recommend products and strategies that are best for the client even if they are not the most profitable for the advisor. Registered investment advisors — RIAs — are generally held to a fiduciary standard.
- Non-fiduciary advisors — are held to a suitability standard meaning they must recommend products that are suitable for the client but not necessarily the best option available. Broker-dealers and insurance agents are often held to this lower standard.
When seeking financial advice especially for retirement planning and estate planning it is generally advisable to work with a fiduciary advisor who is legally required to put your interests first.
How to know if your financial advisor is a fiduciary
The simplest way to find out if your financial advisor is a fiduciary is to ask them directly — are you a fiduciary and are you required to act in my best interest at all times? A fiduciary advisor should be able to answer yes clearly and without qualification.
You can also verify whether a financial advisor is a registered investment advisor — and therefore subject to fiduciary standards — by checking the Securities and Exchange Commission’s Investment Adviser Public Disclosure database at adviserinfo.sec.gov.
Fiduciary duties of trustees
Trustees have particularly well-defined fiduciary duties that are spelled out in state trust law and the terms of the trust document. Key fiduciary duties of a trustee include:
- Duty of loyalty — the trustee must act solely in the interests of the beneficiaries and avoid self-dealing or conflicts of interest
- Duty of prudence — the trustee must manage trust assets with the care, skill, and caution of a prudent investor
- Duty to diversify — unless the trust document provides otherwise the trustee should diversify trust investments to reduce risk
- Duty of impartiality — when there are multiple beneficiaries the trustee must balance the interests of all beneficiaries fairly
- Duty to inform and account — the trustee must keep beneficiaries reasonably informed about trust activities and provide regular accountings of trust assets and transactions
- Duty to keep trust property separate — the trustee must keep trust assets separate from their own personal assets
When a fiduciary breaches their duty
A fiduciary who fails to fulfill their duties can be held legally liable for the resulting harm. Common examples of fiduciary breaches include:
- An executor who misappropriates estate assets for personal use
- A trustee who makes self-dealing transactions that benefit themselves at the expense of the beneficiaries
- An agent under power of attorney who uses the principal’s funds for unauthorized personal expenses
- A financial advisor who recommends investments that generate high commissions for the advisor but are not in the client’s best interest
- A guardian who neglects the needs of the person under their care
Beneficiaries or other interested parties who believe a fiduciary has breached their duty can seek legal remedies including removal of the fiduciary, restitution of misappropriated assets, and damages.
Choosing a fiduciary
When naming someone to serve in a fiduciary role — such as executor, trustee, or agent under power of attorney — it is important to choose someone who is:
- Trustworthy and honest
- Financially responsible and organized
- Willing and able to fulfill the responsibilities involved
- Available and accessible
- Free of conflicts of interest
- Familiar with or willing to learn about their legal obligations
For complex estates or trusts that will last many years many families choose a professional fiduciary — a bank, trust company, or licensed professional fiduciary — rather than or in addition to a family member. Professional fiduciaries bring expertise and continuity but charge fees for their services.
Key terms to know
- Fiduciary — a person or organization with a legal obligation to act in another person’s best interests
- Fiduciary duty — the legal and ethical obligation to act in another person’s best interests
- Executor — the person named in a will to manage the estate, subject to fiduciary duties to beneficiaries
- Trustee — the person or organization managing a trust, subject to fiduciary duties to beneficiaries
- Agent — the person named in a power of attorney to act on behalf of the principal
- Registered investment advisor — RIA — a financial advisor registered with the SEC or state securities regulator and subject to fiduciary standards
- Suitability standard — a lower standard than fiduciary requiring that recommendations be suitable but not necessarily in the client’s best interest
- Professional fiduciary — a bank, trust company, or licensed individual who provides fiduciary services for a fee
Sources
- American Bar Association — Public Resources
- Securities and Exchange Commission — sec.gov
- USA.gov — Estate Planning
- National Association of Personal Financial Advisors — napfa.org
This article is for general informational purposes only and does not constitute legal or financial advice. Laws vary by state and are subject to change. Consult a licensed attorney or financial advisor for guidance specific to your situation.