A fiduciary is morally and legally required to act in the best interest of their client, putting the needs of the client above their own. There is a moral obligation and a legal one, requiring the fiduciary to act with good faith and the utmost trust to act exclusively in the client’s best interests.
There are many examples of a fiduciary situation, such as a power of attorney, attorney/client, and legal guardianship. Typically, however, a fiduciary is used to describe a relationship in a financial capacity like corporate officers, money managers, executors, accountants, board members, insurance agents, financial advisors, and bankers.
What Is Fiduciary Duty?
The best way to describe a fiduciary duty is to give examples of relationships in which fiduciary duty is owed. The first type is a trustee/beneficiary relationship, commonly established to carry out a will and manage the estate. The beneficiary is anyone referenced in the will, and the trustee is an individual or law firm that will make whatever decisions are most beneficial to the beneficiaries.
Another fiduciary relationship is that of a guardian to their ward. The guardian exists as a fiduciary and is granted legal guardianship of a minor and becomes responsible for decisions regarding their care, again in the child’s best interest. Agent/Principal is another relationship in which a fiduciary duty is owed. A common example of this duty is between the fund manager acting as agent for the personal investor, i.e., the principal. The fund manager must only make decisions based on the investor’s bottom line. They cannot consider their fees or commissions in any decision.
Attorney/client is one most are familiar with and probably has the most stringent standards to abide by related to fiduciary duty. Every single action an attorney takes must be in complete trust and fairness to the client. Failure to do so finds the attorney accountable to the court.
What Is a Breach of Fiduciary Duty?
Simply put, a breach of fiduciary duty occurs when the fiduciary is required to act in the entity’s best interest in question and does not. Four elements constitute a breach of fiduciary duty:
- Duty: First of all, you have to show a fiduciary duty existed in which trust and fidelity were established within the relationship. Any of the relationships mentioned above would qualify as owing fiduciary duty.
- Breach: Once evidence is presented to establish a fiduciary duty, the next element is to show that the fiduciary acted in a manner contrary to the best interests of the client.
- Damages: To be considered a true breach of fiduciary duty, the entity owed the fiduciary duty must have encountered damages of some kind. If the breach had no harmful effects, then there’s no method of recourse.
- Causation: The final element is causation, in which it must be shown that the fiduciary was the direct cause of the damages incurred. If the breach did not directly cause the damages, you wouldn’t be able to recoup those damages.
Examples of a Breach of Fiduciary Duty
To help you better understand what a breach of fiduciary duty is, here are several examples:
The agent/principal is probably the most common fiduciary relationship. One such example of this particular fiduciary relationship is employee/employer. As an employee, you act as an agent and owe a fiduciary duty to your employer as the principal. Here are some examples of an agent breaching their fiduciary duty to a principal.
- Not following the employer’s work orders.
- Sharing an employer’s industry secrets.
- Making money at the expense of the employer.
- Working with a competitor.
- Improper use of the employer’s financial resources or improper accounting of funds.
- Not exercising care in doing your duties as an employee.
When an employer is paying an employee or even an independent contractor to perform tasks for them, the employer should be able to trust that their best interests will be served. Failing to do that can result in the employer being awarded compensation for damages caused.
Business partners is a situation in which the parties involved owe a fiduciary duty to each other as well as the company in general. Breaches of this fiduciary duty can be:
- Not disclosing a conflict of interest.
- Mixing personal and business funds and assets or other forms of mismanaging, including failure to account for all funds and assets.
- Taking a business opportunity away from the business to benefit personally.
- Poorly representing the company or damaging the company’s reputation via illicit or immoral behavior.
- Withholding information crucial to the business.
- Being negligent or acting in bad faith and exposing the company to liability.
Board of Directors
A board of directors is a group of people elected by the stockholders of a corporation to oversee the company’s operations and make decisions in the company’s best interest. In smaller corporations, the board of directors is often comprised of majority shareholders. Larger corporations often have professionals outside the stockholders brought in to manage the company. Regardless, the board of directors has a fiduciary duty to the corporation’s stockholders and must act in their interest. Many of the examples listed above in a partnership apply here as well, along with these other examples:
- Giving themselves unreasonable salaries or other benefits.
- Neglecting to pay dividends.
- Preventing stockholders from accessing company records.
- Forcing out minority stockholders via wrongful means.
- Not allowing stockholders to utilize their right to vote.
If the board of directors in whole or an individual(s) breach the fiduciary duty owed to the stockholders, the stockholders can sue the responsible members.
Fiduciary Breach Consequences
While legal ramifications are common when a fiduciary breach occurs, it isn’t the only type of consequence that can occur. For example, even the mere accusation of a fiduciary breach occurring can diminish the reputation of the entity accused, causing them loss of business.
If a breach of duty case does make it to a court of law, there can be various monetary penalties imposed for any damages incurred along with legal fees and potentially punitive damages. Again, losing a lawsuit involving a breach of fiduciary duty can destroy that individual’s or company’s reputation, effectively putting them out of business. Losses of licensure and accreditations can also occur, causing further damage.
3D Partners Wealth Advisors not only have the legal and moral obligation to perform in your best interest but there are no additional fees that could conflict, making this type of fiduciary the best type to seek to manage your financial future. If you’d like more information on our fee-only fiduciary method, contact 3D Partners Wealth Advisors.