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What is a fiduciary duty and how does it impact businesses?

On Behalf of | Nov 16, 2022 | Commercial Litigation

A fiduciary is a person or organization that acts on behalf of another person’s best interests. Fiduciaries are often financial advisors, money managers, insurance agents, bankers, attorneys or executors. Board members and corporate officers also are considered fiduciaries because they put the interest of the client or those represented by them before their own interests. The fiduciary accepts legal responsibility for not only the care of money and other assets but also confidentiality, good faith and loyalty.

A fiduciary duty is the relationship between a fiduciary and the person on whose behalf they act. Quite often, fiduciary duty involves financial interests, but in the broader sense, it can also relate to guardianship or management. When a fiduciary fails to act in a responsible manner that is in the best interest of the person they represent, it is referred to as a breach of fiduciary duty.

Understanding fiduciaries in business

Though fiduciary duty occurs in some personal circumstances, such as when asked to manage your friend’s finances when they are ill or representing the estate of minor children in case of parental death, most cases of fiduciary duty occur in business relationships. These fiduciary relationships assign both an ethical and legal duty, where the fiduciary is required to act in the best interest of the client or the party whose assets they are managing.  Some common business fiduciary relationships occur between trustees and beneficiaries, attorneys and clients, insurance agents and policyholders, brokers and stockholders and board members and shareholders. There can also be a fiduciary duty between an employee and their employer, as is often outlined in an employee handbook or contract.

When working with a fiduciary, you should feel confident that they will always put your interests before their own, without worrying about conflicts of interest or misplaced loyalty and trust. When breaches of fiduciary duty occur, the actions that are taken by the fiduciary violate or in some way do not show the best interests of the beneficiary are being observed and honored. Most typical are when the fiduciary’s interests are placed above the person they represent or when they fail to disclose pertinent information. 

What happens if there is a breach of fiduciary duty?

There are several things that can happen if there is a breach of fiduciary duty or even a suspected breach. If there is a suspected breach, even if it is not proven, at the very least, it can earn the fiduciary a tarnished reputation. They may lose the client’s business and any referral business they may have gotten.

If the breach of fiduciary duty goes to court and a breach is successfully proven, it could result in financial penalties for damages, payment for indirect damages and additional fines and court costs. If legally proven to be a breach of fiduciary duty, the fiduciary could lose their position, license, or employment.