Fiduciary Relationship Meaning: Everything You Need to Know
A fiduciary relationship meaning refers to a relationship wherein one party puts special confidence, trust, and reliance on, and is influenced by, someone else.3 min read
A fiduciary relationship meaning refers to a relationship wherein one party puts special confidence, trust, and reliance on, and is influenced by, someone else. This other person has a fiduciary duty to act in the original party's best interests. You may also hear a fiduciary relationship referred to as a confidential relationship or a fiduciary duty. There are two main categories of fiduciary duties:
- Duty of care
- Duty of loyalty
Fiduciary relationships can be created by an express agreement between the parties, or they might be imposed by statute and established by the parties' conduct. You'll find typical fiduciary relationships between a number of parties:
- Attorneys and clients
- Agents and principals
- Trustees and beneficiaries
- Bankruptcy trustees or receivers and creditors
- Executors or administrators and heirs or legatees
- Corporate officers or directors and stockholders
- Confidential advisors and their advisees
- Guardians and wards
Responsibilities of a Fiduciary Relationship
Fiduciary relationships are seen in a variety of legal contexts, including wills, trusts, contracts, and elections, like that of a corporate board of directors. Both their duties and remedies derive from a mutual source, which is equity.
Whoever is designated as the fiduciary is the one who owes a legal duty to his or her principal. There should be strict care taken to verify there is no potential conflict of interest between a fiduciary and his or her principal. In most situations, there is no profit from a fiduciary relationship, unless there is express consent granted when the relationship begins. Fiduciaries are required to account for illicit profits, even if the entrustor suffered no harm. The entrustor can pursue damages as well.
A fiduciary must be capable of accepting that trust and have the confidence to exercise his or her expertise and discretion when acting on behalf of the client. A client has the right to expect the fiduciary will put forth his or her best efforts and exercise all their care, skills, and diligence.
Features of a Fiduciary Relationship
A fiduciary relationship is a service relationship. Some types of fiduciaries, like partners, can be both fiduciaries and entrustors of each other. To effectively perform their services, fiduciaries are entrusted with power over an entrustor or his or her property. How much power is entrusted to a fiduciary varies based on the parties' desires and terms of the agreement. The amount of power entrusted to a fiduciary also relates to the expense of specifying the future course of action.
Different Types of Fiduciary Relationships
The similarities and differences in a fiduciary relationship offer an explanation of why laws regulate them in the first place, and why that regulation can vary based on the class of fiduciary. It's important to understand how some of these fiduciary relationships operate:
- Trustee/Beneficiary — The trustee is the fiduciary and the beneficiary is the principal, and the fiduciary holds the necessary power to handle assets placed in the trust. The trustee will make important decisions that are in the best interests of the beneficiary.
- Guardian/Ward — The guardian is the fiduciary, and has the important task to ensure the minor child or ward has the appropriate care. This can include determining where the child should attend school, medical care, that he or she is disciplined in a reasonable manner, and that his or her daily welfare remains intact.
- Principal/Agent — This is a more generic example of a fiduciary relationship. A principal can be an individual person, a partnership, corporation, or government agency, provided the person or company has the legal capacity. In this situation, the agent is legally appointed to act on the principal's behalf without a conflict of interest.
- Attorney/Client — This can be one of the strictest fiduciary relationships. As the fiduciary, an attorney must act with complete loyalty and in complete fairness in each and every representation of a client. An attorney is held liable for a breach in fiduciary duty, and he or she will be held accountable by the court when a breach occurs.
- Agent/Buyer or Seller in Real Estate — The real estate agent is the fiduciary and the buyer or seller is the principal. An agent for the buyer works on his or her behalf and has to put the buyer's interests before the agent's. A seller's agent is prohibited from telling the buyer whether a seller will accept less, and they can't divulge personal information about the seller unless the agent has express written permission.
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