Oct 13, 2022
What is a fiduciary?
A fiduciary is an individual or an organization that legally acts on behalf of another person or group. The fiduciary relationship may involve financial management or assuming responsibility for the well-being of another person in some other way. Legally, a fiduciary is required to act in the best interest of, and in a way that is beneficial to, their client. This bond is one of the highest legal standards of duty that one party can owe to another.
In this article, we’ll cover:
- Fiduciary relationship types
- Responsibilities of a fiduciary
- Fiduciary duty vs. suitability standard
- The importance of fiduciary financial advisors
Types of fiduciary relationships
While most people associate the term “fiduciary” with finances, fiduciary duty does not always include money or wealth management. Acting as a fiduciary is a fairly common legal role in a variety of everyday professional relationships. Some fiduciaries are tasked with managing well-being, as with doctor/patient or guardian/ward relationships. Other fiduciary relationships, like that of a financial advisor and their client, are directly related to money management. Either way, these fiduciaries are responsible for acting in their client’s best interests both legally and ethically.
- Attorney and client: As a fiduciary, an attorney must act with loyalty, fairness, and care within the law on behalf of their clients. This is one of the strictest fiduciary relationships, requiring a high level of trust and confidence between the parties involved. Clients can sue attorneys for breach of fiduciary duty if the attorney violates the agreement.
- Doctor and patient: This relationship is based on the patient’s trust or confidence in the doctor, in turn creating certain obligations or duties that the doctor owes the patient. Doctors are obligated to keep patient information confidential and to share accurate health information with the patient. Patients can sue doctors for breach of fiduciary duty or medical malpractice for withholding information, providing misleading information, and performing unnecessary services.
- Guardian and ward: In this relationship, an adult is designated as the guardian of a minor. The guardian is responsible for all matters related to the daily well-being of the child. A guardian may be appointed by a state court when a parent is unable to care for their child or when a parent dies. In most states, the guardian/ward relationship remains intact until the minor reaches adulthood. Guardians may also be designated for adults who are unable to independently care for themselves. A guardian who breaches the terms of the fiduciary relationship may have their guardianship revoked, and they can also be subject to legal action.
- Board member and shareholder: Corporate board members are trustees bound by their fiduciary responsibilities to shareholders. Board members are obligated to make decisions that financially benefit the shareholders. They are also expected to set aside their personal interests while being informed, prepared, and engaged representatives for shareholders. A breach of fiduciary duty may result in personal legal liability for the trustee.
- Financial advisor and client: Financial advisors have a fiduciary duty to act in the best interest of their clients, offering investment advice and the lowest-cost financial solutions to fit their client’s needs. A fiduciary financial advisor will not recommend an investment that doesn’t benefit you, fit your risk profile, or match your financial goals. Violation of fiduciary duty could include negligence, making unauthorized trades on your account, misrepresenting a security or transaction, or churning your account by generating commissions through excessive trade. Advisors who violate the relationship may be liable to their clients for any financial losses. Note that not all financial advisors are fiduciaries; those that aren’t do not have the same legal obligation to put their clients’ interests first.
The duty of a fiduciary
A fiduciary is not held to a standard of perfection. Rather, they are obligated to show that their services and advice are reasonably good and legally sound. First and foremost, they must put their client’s interests ahead of their own. Additionally, they are obligated to ensure full disclosure of all material facts, avoid conflicts of interest, preserve confidentiality, and provide suitable advice. Further, the duties of a fiduciary may be categorized as the “duty of care,” and the “duty of loyalty.”
Duty of care
Duty of care is the moral and legal responsibility to prevent harm. It requires fiduciaries to make decisions in good faith and a relatively prudent manner. Financial advisors, for example, must only make investment decisions on your behalf after taking all available information into account to ensure your money is being handled according to your wishes.
Duty of loyalty
Duty of loyalty requires your financial advisor to act in your best interest at all times, even if doing so is not beneficial to them. In the case of fiduciary financial advisors, for example, they are prevented from favoring one client over another. Additionally, they must disclose and avoid all conflicts of interest, as well as keep your information confidential at all times.
Fiduciary duty vs. suitability standard
It’s important to note that not all financial advisors are fiduciaries. Some operate under what’s known as the suitability standard, which requires brokers and investment advisors to recommend investments that are suitable for the client. Advisors who uphold the suitability standard are required to have a reasonable basis for their recommendations. They must base their decisions on their client’s investment profile, risk tolerance, and time horizon. While their recommendations and management can’t be deemed unsuitable for their client’s needs, the suitability standard doesn’t require acting in the best interest of their client.
The importance of having a fiduciary financial advisor
Fiduciary financial advisors build their client relationships on trust and a legal duty to represent your interests. When you’re allowing someone to manage and provide advice for something as vital as your assets, the legally and ethically binding nature of the fiduciary relationship can provide peace of mind. A fiduciary financial advisor must always act in your best interest, so they’ll help you maximize your investment earnings, navigate major life events that affect your finances, and provide all relevant information about your finances. While all investing involves risk, including the risk that you could lose money, working with a fiduciary can provide confidence that your interests are being served.
And if you’re concerned about the cost of a financial advisor, you don’t necessarily have to sacrifice quality and trust. Robo-advisors, which are often a lower-cost option than a personal advisor, are fiduciaries when they’re operated by a fiduciary entity and are held to the same fiduciary duty as certified human financial advisors.
In most states, financial advisors must obtain a license to be considered fiduciaries. Doing so requires meeting rigorous educational and experience standards, and often involves passing exams. You can find out if a financial advisor is a fiduciary by checking to see if they’re registered as one with the Securities and Exchange Commission (SEC).
Invest in your future with confidence
When you’re looking for someone to help manage your money and invest in your future, working with a fiduciary financial advisor provides a high degree of trust and confidence. Stash is an SEC-registered financial advisor, and we take our fiduciary responsibility seriously. Stash’s fundamental obligation is to act in your best interest and ensure you can trust us to support your financial future.
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