Define Fiduciary Duty in Business
Understanding that a basic respect for an individual or general trust in another's character does not signify a fiduciary relationship.3 min read
Do you want to define fiduciary duty in business? First, it starts with understanding that a basic respect for an individual or general trust in another's character does not signify a fiduciary relationship. The relationship must involve complete confidence in another and an acceptance by the other party. It must be concerning general affairs or business in order for a fiduciary relationship to exist. A fiduciary relationship involves a fiduciary duty, which may be the duty of loyalty and/or the duty of care. A fiduciary acts in the best interest of the beneficiary.
Examples of Fiduciary Relationships
These duties vary with different types of relationships between fiduciaries and the courts have not defined the particular circumstances from which such an association may arise. Examples of relationships that are all universally regarded as fiduciary include:
- Between a broker and principal
- Between an attorney and client
- Between a principal and agent
- Between a trustee and beneficiary
- Between heirs of a decedent's estate
Understanding Fiduciary Relationships
When an individual places a high level of trust in another individual and such individual accepts, this creates a relationship where one person is influenced by the dependence on another individual. Not all blood relationships signify a fiduciary relationship. For example, parents do not automatically have a fiduciary relationship with their children.
Courts take special care to examine transactions between fiduciary relationships. Courts will void transactions if the dominant individual obtains an advantage or profit at the expense of the party under his or her influence; this is referred to as Influence of the fiduciary. A fiduciary obligation is the responsibility of one party to act in the best interest of the other. This party is considered the fiduciary.
A fiduciary duty is the highest duty known to law, and even without openly agreeing to take on such obligations, a fiduciary has a fiduciary duty of loyalty and good faith. Conflict of interest, or a potential conflict of interest, must be fully disclosed. Many relationships can create a fiduciary duty, such as a partner in a company, a doctor to a patient, or a lawyer to a client, and this is why it's important to understand the obligations and duties involved and to realize the exposure to liability one takes on.
More Examples of Fiduciary Duty Relationships
A few more examples of fiduciary relationships are below:
- Employee to employer
- Trustee of trust to beneficiaries
- Financial advisor to client
- Broker to client
- Director of corporation to corporation and its shareholders
- Agent to principal
- Trustee of trust to beneficiaries
- Insurance broker to client
When someone is obligated to do something, this means they have a duty to fulfill the obligations. The fiduciary duty involves the fiduciary to avoid at all cost any actions that negatively hurt the interest of the beneficiary. This could involve proactive research and study before acting and then doing what is best for the beneficiary.
For instance, the relationship between a lawyer and a client is considered a fiduciary relationship. The lawyer can't just think about his or her self. The lawyer has a fiduciary duty to act in the client's best interest and the client trust that the lawyer will fulfill the fiduciary duty.
What Is the Importance of Fiduciary Relationships?
As previously discussed, there are multiple types of relationships that can create a fiduciary duty. Likewise, different fiduciary duties exist as well. For example, in a doctor to patient relationship, the fiduciary, the doctor, owes the beneficiary, the patient, a duty of care. The fiduciary in this relationship must be accredited, receive the proper training, be licensed and so forth. This is because the fiduciary owes the beneficiary the duty of competence, too.
In addition, the fiduciary must remain loyal to the beneficiary's interests over his or her own, such as in prescribing or performing any medications or procedures that are not in the best interest of the beneficiary. This sounds easy enough, but perhaps the fiduciary can receive a kickback if he or she prescribes an x amount of a medication over a set period and the medication is not in the best interest of the beneficiary. This is why the fiduciary is obligated to the duty of loyalty in this relationship as well.
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