What is a Fiduciary Duty?

A fiduciary duty is a legal responsibility created when a person agrees to act as an agent on behalf of someone else to manage assets. Some examples of situations where fiduciary duty can arise include attorney-client relationships, executorships of estates, board members of a publicly traded company, and relationships between real estate agents and their clients. In all these cases, trust is being placed in an individual to manage assets responsibly and wisely by a client, and the person entrusted with the assets is held to a very high standard of behavior.

A person in a position of fiduciary duty is expected to act with loyalty, putting the interests of the client first in all matters. They represent their clients in negotiations and must advocate for their clients, as when a real estate agent negotiates the best deal on the sale of real estate, keeping the needs of the clients in mind. People in this position are not allowed to have conflicts of interest, or even to have the appearance of a conflict. In an obvious example, an attorney cannot represent both sides of a case.

In addition, a person in this position is expected to act with care. Although an individual with a fiduciary duty may officially have the title to the client's assets, that person must treat those assets with special care, respecting the requests and needs of the client. Brokers cannot treat the assets they control as their own, for example, because they are holding them on behalf of clients and are expected to execute trades that will serve the best interests of their clients. This may mean making decisions they might not be inclined to make for themselves.

Legally, these relationships are held to a high standard, recognizing a potential for abuse. When people entrust assets, legal rights, and other matters to other individuals, they rely on those individuals to act with care and loyalty in executing the duties they have been charged with. Failure to do so is considered a breach of fiduciary duty and can result in legal penalties. For example, if the board members of a company vote on a deal that runs against the interests of the shareholders, there are legal remedies available to the shareholders to address the matter.

In a relationship where fiduciary duty is created, both parties typically will sign contracts spelling out their rights and responsibilities. People who want to understand their rights and responsibilities more clearly can ask to have them explained, or consult an attorney to get information about the legal guidelines in a given situation.