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Fiduciaries: What Is a Fiduciary? 6 Key Takeaways

When you hear the word “fiduciary” you may think of something to do with money. And while the word “fiduciary” does often get used in financial contexts, the term deals with much more than just money. In fact, a fiduciary’s role is based in a trusting relationship with their clients, rather than a financial one. 

Knowing what a fiduciary is can be important if you own stocks, have a will, or work with a lawyer. Read on to learn more about fiduciaries and what their roles and responsibilities look like.

1. What Is a Fiduciary? 

Although most of us tend to think of financial issues when we think about fiduciaries, the definition of the role actually doesn’t have anything to do with money. A fiduciary is a person who is legally bound to act on behalf of another person or group of people. They’re required by law to put their clients’ needs ahead of their own and to preserve good faith and trust.

That being said, fiduciaries do often act in financial situations. Their roles may include managing another person’s wealth, handling trusts, executing wills, and so on. There are a number of people who operate in and around the financial world whose roles may involve them taking on fiduciary responsibilities. 

2. How the Fiduciary Relationship Works 

Fiduciary-client relationships follow a very specific set of rules, particularly for the fiduciary. In this relationship, the fiduciary is anyone who has agreed to act on behalf of a client and with their best interests at heart. The most important rule for a fiduciary is that they cannot do anything that breaks the trust of their beneficiary.

A fiduciary can’t make decisions that benefit them while harming their client or providing them undue benefits. They also can’t hire people to work with the client’s assets who aren’t qualified to do the job. The fiduciary is responsible for the work they outsource, and hiring people who are incompetent can be considered a breach of trust.

3. Fiduciary Situations

There are a number of different situations in which a fiduciary relationship may get established. One of the most classic examples is a trustee and beneficiary, in which a fiduciary controls a person’s wealth or assets until they are able to manage them on their own. Board members and shareholders also have a fiduciary relationship, with the board members acting as the fiduciaries.

Will executors also take on fiduciaries’ duties, as do guardians for minors in the foster care system. You might be surprised to learn that attorneys are considered fiduciaries since they have to put their clients’ best interests ahead of their own. And investment bankers are considered fiduciaries since they’re in control of their client’s wealth. 

Some fiduciaries work with the National Council of Real Estate Investment Fiduciaries.

4. Risks of Being a Fiduciary

Given the number of responsibilities fiduciaries hold, it shouldn’t come as a surprise that the job can be somewhat risky. It may seem like as long as the fiduciary is putting their client’s interests first that they should be safe, right? But the issue can get a little more complicated than that, especially in the case of wealth management or shareholders.

In some cases, simply keeping a client’s interests above your own isn’t enough to satisfy the demands of “good faith.” If a wealth manager or board member isn’t generating enough profit for their client, that could be considered a breach of good faith. Since the client isn’t getting the growth they expected, they may start to question if the fiduciary is doing enough on their behalf.

5. What Happens When a Fiduciary Breaches Responsibilities? 

We’ve mentioned that a fiduciary is legally required to act in their clients’ best interests, but what happens when they breach those responsibilities? The first thing that’s likely to happen is the client can sue if they feel their contract with the fiduciary has been violated. They may be able to collect damages for any lost money, as well as punitive damages.

From the fiduciary standpoint, a breach of responsibility lawsuit can be devastating. If a judge determines that you didn’t do enough to promote your clients’ best interest, they may slap you with an enormous bill for damages. You may also lose credibility or the ability to serve as a fiduciary in the future, depending on where you live.

6. Fiduciary Insurance

Given that fiduciaries take on so much risk, it may come as no surprise that many choose to get insurance. Fiduciary insurance is designed to protect you from liability in the case of a lawsuit. Your insurance will help to cover any damages you have to pay, as well as help with your legal fees.

Oftentimes, companies that employ a lot of fiduciaries may offer liability insurance through the company. If you’re working on your own as a fiduciary, it’s worth the investment to pay for insurance. You don’t want to wind up losing everything because a client felt you didn’t do enough for them.

Learn More About Fiduciaries

Fiduciaries are in a unique role, acting as a trusted advisor for their clients. Although fiduciaries often act in financial roles, their work can include non-financial situations as well. The primary thing that defines a fiduciary is that they are legally bound to put their clients’ needs ahead of their own. 

If you’d like to learn more about fiduciaries, check out the rest of our site at Bogart Wealth. We believe that, when it’s time to plan for retirement or transfer your wealth to the next generation, you should ask tough questions. Contact an advisor today and discover why the answer is Bogart Wealth.

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 
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