What Is a Fiduciary Duty? Examples and Types Explained

Fiduciary duty refers to the relationship between a fiduciary and the principal or beneficiary on whose behalf the fiduciary acts.

The fiduciary accepts legal responsibility for duties of care, loyalty, good faith, confidentiality, and more when serving the best interests of a beneficiary. Strict care must be taken to ensure that no conflict of interest arises to jeopardize those interests. If a fiduciary learns of a conflict of interest they should immediately disclose it.

Key Takeaways

• A fiduciary duty involves actions taken in the best interests of another person or entity.
• Fiduciary duty describes the relationship between an attorney and a client, a guardian and a ward and/or a condominium board member, whether elected or sponsor-appointed.
• A fiduciary duty exists between condominium owners and the condominium board members, whether elected or sponsor appointed.
• Fiduciary duties include duty of care, loyalty, good faith, confidentiality, prudence, and disclosure.
• It has been successfully argued that an employee may have a fiduciary duty of loyalty to an employer.
• A breach of fiduciary duty occurs when a fiduciary fails to act responsibly in the best interests of a client.

How the Fiduciary Rule Can Impact You

Examples of Fiduciary Relationships

Trustee/Beneficiary

A single parent with young children might create a trust to administer the assets that the children would inherit should the parent die while the children are still underage.

In this case, the parent will name a person or an entity, such as a law firm or bank, as trustee of the estate. That person or entity has a fiduciary duty to the children, who are the beneficiaries of the estate.

In a trustee/beneficiary relationship, the fiduciary (trustee) has legal ownership of the property and controls the assets held in the trust.

As fiduciary, the trustee must make decisions that are in the best interest of the beneficiary as the latter holds equitable title to the property.

The trustee/beneficiary relationship is an important aspect of comprehensive estate planning. Special care should be taken to determine who is designated as trustee.

Guardian/Ward

In a guardian/ward relationship, an adult is designated as the legal guardian of a minor child. The guardian, as the fiduciary, is tasked with ensuring that all matters related to the daily welfare of the child are dealt with responsibly and in the best interests of the child. This care can include such things as deciding where the child will attend school, arranging for health care, and providing an allowance.

A guardian may be appointed by a state court when a parent dies or is unable to care for the child for other reasons. In most states, the guardian/ward relationship remains intact until the minor child reaches adulthood.

Agent/Principal

Any person, corporation, partnership, or government agency might be called upon to act as agent without conflict of interest on behalf of a principal.

A common example of an agent/principal relationship that implies fiduciary duty is that between the executives of a company and its shareholders. The shareholders expect that the executives will make well-considered, prudent decisions on their behalf and in their best interests as owners.

A similar fiduciary relationship exists between personal investors and the fund managers they select to manage their assets (Bernie Madoff’s still living children can explain).

Attorney/Client

The agreement between an attorney and a client is arguably one of the most stringent of fiduciary relationships.

The U.S. Supreme Court has stated that the highest level of trust and confidence must exist between an attorney and a client. An attorney, as a fiduciary, must act with fairness, loyalty, care, and within the law on behalf of the client.

Attorneys can be sued for breaches of their fiduciary duties by clients. They are accountable to the court in which a client is represented when a breach occurs.

Controlling Stockholder/Company

In certain circumstances, fiduciary duties may be required of a stockholder who possesses a majority interest in a corporation or who exercises control over its activities. A breach of fiduciary duty may result in personal legal liability for the controlling shareholder as well as directors and officers.

The adjective fiduciary means held or given in trust. A fiduciary commits to acting in the best interests of a principal or beneficiary.

Condominium Board Members

It’s a big deal to be on the Board of a Condominium which generally comes with a lot of power and responsibility. Members of a condo board have what is called a “fiduciary duty.” This means that they are responsible for making decisions on behalf of their community that are in the best interests of the community as a whole and not just in their own best interests.

A Special Relationship

Fiduciary duties stem from special relationships between people, in this case, condo board members and unit owners. Other relationships that require fiduciary duties include clergyman/congregant, lawyer/client, stockbroker/client, and so on.

A fiduciary duty requires that someone must act in more than just his or her own self-interest, but rather higher responsibilities. And it’s important to differentiate that they must be thinking about what’s best for the whole condo association and not just for themselves.

The fiduciary duties of a condo board member include the duty to maintain, repair, and restore common areas of the condominium complex and discard their own interests if they conflict with the interests of the other unit owners, generally.

A Breach of One’s Fiduciary Duty

While there are a variety of ways in which a condo board member can breach his or her fiduciary duty, these abuses of power generally fall into one of four categories: 1) self-dealing; 2) exercising personal vendettas; 3) selective enforcement; or 4) commingling money, kind of like an FTX/Alameda Research scenario. Like Sam Bankman-Fried has been quoted as saying, “I made a lot of mistakes, but I never tried to commit fraud.” SDNY Judge, Lewis Kaplan is presiding.

1. Self-dealing

Self-dealing occurs when someone obtains a personal advantage due to their position even though the opportunity should have been available to everyone.

1. Exercising of Personal Vendettas

One exercises a personal vendetta when they treat someone unfairly due to a personal issue that they have with that person and not for any other legitimate reason.

1. Selective Enforcement

The third type of abuse of power is when someone plays favorites or dislikes someone and only enforces the rules or regulations with some people but not everyone.

Abuses of Power

If a condo board member is found to have breached his or her fiduciary duty, the consequences that they will face are dependent upon the specific facts and circumstances of the breach.

Types of Fiduciary Duties

Fiduciary duties may differ depending on the type of beneficiary that a fiduciary serves. However, in general, the legal and ethical obligations related to protecting the interests of beneficiaries include the following duties:

Duty of Care

This is the responsibility to inform oneself as completely as possible in order to exercise sound judgments that protect a beneficiary’s interests. It can involve the thoughtful consideration of options and sensible decision-making that’s based on a careful examination of available information.

Duty of Loyalty

This pertains to acting in the best interest of the beneficiary at all times, putting their well-being first and foremost. It includes the duty of the fiduciary to excuse themself from taking actions when there’s a conflict of interest with the beneficiary’s welfare.

Duty of Good Faith

This duty pertains to always acting within the law to advance the interests of the beneficiary. At no time should the fiduciary take actions that are outside of legal constraints.

Duty of Confidentiality

A fiduciary must maintain the confidentiality of all information relating to the beneficiary. They must not use any form of it, whether written or spoken, for their personal gain.

Duty of Prudence

Fiduciaries must administer matters and make decisions concerning the interests of beneficiaries with the highest degree of professional skill, caution, and critical awareness of risk.

Duty to Disclose

Fiduciaries must engage in completely forthright behavior, disclosing any and all relevant information that could have an impact on their ability to carry out their duties as fiduciary and/or on the well-being of a beneficiary’s interests.

Breaches of Fiduciary Duty

Fiduciary duties are taken on by individuals and entities for various types of beneficiaries. Such relationships include, among others, lawyers acting for clients, company executives acting for stockholders, guardians acting for their wards, stockbrokers or financial advisors acting for investors, condominium board members, both sponsor-appointed and unit owner elected, and trustees acting for estate beneficiaries.

An employee may even have a fiduciary duty to an employer. That is, employers have a right to expect that employees are acting in their best interests. For example, they are not sharing trade secrets, or using company equipment for private purposes, or stealing customers from a competitor.

These expectations may not be actual fiduciary duties but they may be spelled out in an employee handbook, a Condominium POS or a contract clause.

Case law indicates that breaches of fiduciary duty most often happen when a binding fiduciary relationship is in effect and actions are taken which violate or are counterproductive to the interests of a specific beneficiary.

Typically, the inappropriate actions are alleged to have benefited the fiduciary’s interests or the interests of a third party instead of a principal’s or beneficiary’s interests. In some cases, a breach stems from a fiduciary’s failure to provide important information to another who they owe a fiduciary duty to, which leads to misunderstandings, misinterpretations, or misguided advice.

Disclosure of any potential conflict of interest is important in a fiduciary relationship because any conflict can be seen as a cause for a breach of trust.

Consequences of a Fiduciary Breach

A breach of fiduciary duty can lead to a number of consequences. Not all of them are legal consequences.

1. An accusation of a breach of fiduciary duty can hurt the reputation of a professional. A client can end a professional relationship because they do not trust in a professional’s care of the required fiduciary duty.
2. If a breach of duty case proceeds to the courts, steeper consequences can result. A successful breach of fiduciary duty lawsuit can result in monetary penalties for direct damages, indirect damages, and legal costs.
3. A court ruling can also lead to industry discrediting, the loss of a license, or removal from service.

However, proving a breach of fiduciary duty is not always easy.

Elements of a Fiduciary Breach Claim

A number of legal precedents and elements have been established to allow claims by those who have been harmed by a breach of fiduciary duty. Jurisdictions differ, but in general, the following four elements are essential if a plaintiff is to prevail in a breach of fiduciary duty claim.

A Duty Existed

The plaintiff must show that a legal fiduciary duty existed. Many professionals are obligated, legally and ethically, to conduct their businesses honestly. However, that doesn’t mean that they are fiduciaries who must act solely in the interest of a particular client. A fiduciary duty is accepted as such by a fiduciary, typically in writing.

A Breach Occurred

The plaintiff must show that a fiduciary duty was breached. The type of breach varies in every case. For example, if an accountant was sloppy in filling out a client’s tax returns, and the client was slapped with an enormous fine for nonpayment, the accountant may be guilty of a breach of fiduciary duty. However, if the client was sloppy and failed to provide complete and necessary information, no breach occurred.

Damage Was Sustained

The plaintiff must show that the breach of trust caused actual damage. Without damage, there is usually no basis for a breach of fiduciary duty case. The more specific a principal or beneficiary can be with facts of damage, the better.

For example, a trustee might be sued for selling a beneficiary’s property too cheaply. If the buyer is a relative of the trustee, it’s clearly a conflict of interest. However, a specific accounting relating to the loss to the beneficiary is needed to prove a breach of fiduciary duty.

Causation Was Proved

Causation shows that any damages incurred by the plaintiff were directly linked with the actions taken in breach of fiduciary duty. In the above example of a property sale, the link appears to be clear. However, the trustee might argue that a quick sale was in the best interest of the beneficiary and that no other buyer was interested.

What Does It Mean to Have a Fiduciary Duty?

The adjective fiduciary means held or given in trust. In accepting a fiduciary duty, an individual or entity accepts a legal commitment to act in the best interests of a beneficiary.

What Does It Mean to Be a Fiduciary?

A fiduciary is entrusted with the authority to act on behalf of another person or entity and has the legal and ethical obligation to act in the best interest of them. A fiduciary agrees to put a beneficiary’s interest above their own.

The Bottom Line

Fiduciary duties refer to the ways that a fiduciary is legally committed to act for a principal or beneficiary. They include a duty of loyalty, a duty of care, a duty of prudence, a duty of confidentiality, a duty not to commingle funds, a duty to proactively avoid conflicts of interest and more.

Fiduciary duties are meant to ensure that the fiduciary acts only in the best interests of a principal or beneficiary. What’s more, the fiduciary must act diligently to protect those interests.