Fiduciary

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When one person or entity agrees to act on behalf of another person or entity in matters of importance, such as legal, financial, and authority, he or she is considered a “fiduciary.” The client, trustor, or beneficiary, has the right to expect the fiduciary to put forth his best effort, using all of his expertise, skill, and care in acting on the principal’s behalf.

A fiduciary is held to a lofty standard in the eyes of the law, being expected to act honestly and diligently, and to make full disclosure to his principal. A fiduciary may not take any action that benefits him personally at the expense of the principal.  To explore this concept, consider the following fiduciary definition.

Definition of Fiduciary

Noun

  1. A person or entity to which property, assets, or power have been entrusted for the benefit of another.

Adjective (Fiduciary Duty)

  1. The obligation of a fiduciary to another person or entity, called a “principal.”

Origin

1585-95 Latin fīdūciārius, of something held in trust

What is Fiduciary Duty

A fiduciary duty exists when a person or entity has an obligation to act in another person or entity’s best interest. This comes into play when the relationship between the two parties involves a particular trust or confidence in, and reliance upon one party by another. For example, an attorney has a fiduciary duty to his client, and the board members of a corporation have a fiduciary duty to the company’s shareholders. In such a case, a fiduciary is expected to use his expertise and good judgment in acting on the client’s behalf. In the U.S. legal system, the fiduciary duty is considered the most stringent duty of care. Fiduciary duty may be referred to as “fiduciary responsibility.”

Fiduciary Responsibility in Administering a Trust

When assets belonging to a person or entity are put into a trust, the “Trustee,” or administrator of the trust, becomes a fiduciary for the benefit of the trust’s creator, the “trustor.” The trust fiduciary has a solemn responsibility of loyalty in managing the assets of the trust in the best interest of the named beneficiaries. It is not permitted for a trust fiduciary to profit in his dealings with the trust at the expense of the beneficiaries, and is not permitted to purchase or otherwise acquire any of the trust’s assets for himself.

Every trust fiduciary must take the same care in managing the assets of the trust as he would his own assets. Anyone acting as a fiduciary who has held themselves out to have greater skills than ordinary people, such as an accountant, attorney, or other professional, is held to a higher standard of care, as he is expected to use his expertise in acting on behalf of the trust.

Breach of Fiduciary Duty

Any person or entity with a fiduciary duty who fails to uphold, or fails to act responsibly in fulfilling, his duties, obligations, and responsibilities as fiduciary, has breached his fiduciary duty. Generally, the law requires the fiduciary to restore or repay any losses resulting from a breach of fiduciary duty, and the court may order other remedies, such as additional financial sanctions, and the award of attorney’s fees. The courts in the United States have heard, over the years, many matters involving breach of fiduciary duty.

Interclaim Holdings v. Ness, Motley, Loadholt, Richardson & Poole

Interclaim Holdings, in the business of identifying, tracking, and freezing assets of financial criminals for the purpose of making restitution to the criminals’ victims, hired the law firm of Ness, Motley, Loadholt, Richardson & Poole (“Ness Motley”) to file a class action lawsuit against the criminal network “Down Group.” Without notifying Interclaim, Ness Motley negotiated secretly with Down Group for a settlement not authorized by Interclaim. When confronted, Ness Motley withdrew as Interclaim’s counsel, and negotiated a deal with Down Group that limited what the company would have to pay Interclaim’s clients, while garnering a hefty sum in fees to Ness Motley.

Interclaim filed a 2004 lawsuit against Ness Motley claiming breach of fiduciary duty, as well as breach of the retainer agreement between Interclaim and Ness Motley. Ness Motley was found guilty of both charges, the jury awarding Interclaim $8.3 million in compensatory damages, and $27.7 million in punitive damages.

FDIC v. Van Dellen

IndyMac Bank, considered one of the greatest bank failures during the financial crisis of 2008, was sued in the 2010 Van Dellen lawsuit, by the FDIC for actions amounting to breach of fiduciary duty. The bank’s President and CEO, Chief Lending Officer, and Chief Credit Officer allegedly approved 23 failed loans without ample information, in violation of the bank’s policies. The jury in this case came to the decision that the bank’s officers were negligent in their actions, breaching their fiduciary duties to the bank, its clients, and the FDIC. On December 7, 2012, in conclusion to the 16-day trial, the jury awarded the FDIC nearly $170 million in damages.

Fiduciary Management

The term “fiduciary management” is commonly used to refer to the management of financial assets by a fiduciary through the use of investment services. Primarily, fiduciary management refers to the management of institutional assets and pension funds. The 21st century has seen a greater complexity, more investment options, and increased regulatory intricacy in the management of assets and investments. This has created the need for fiduciary management of assets belonging to both individuals and entities.

Fiduciary managers aid such asset owners by offering advice on creating an effective investment strategy based on the individual or entity’s financial needs. The Fiduciary manager provides active day-to-day management of the client’s diverse investment portfolio, as well as risk assessment and management.

Many people seeking to develop an investment portfolio for the purpose of growing their personal wealth turn to fiduciary management companies. Such companies employ asset managers experienced in developing sound investment strategies, and managing their clients’ assets in an ever-changing global market.

Liability Insurance for Fiduciaries

Under the Employee Retirement Income Security Act of 1974 (“ERISA”), financial fiduciaries may be held personally responsible for breach of their fiduciary duties in handling the assets for which they have been entrusted. While fiduciary liability insurance is not required under ERISA or other fiduciary laws, it protects the personal assets of the fiduciary in case of an error. Liability insurance for fiduciaries covers the trustee for penalties and legal fees in the event he is sued regarding his stewardship over the assets.

Fiduciary Bond

A fiduciary bond is a court-ordered bond that guarantees the fiduciary, executor, or guardian in a trust matter performs all assigned duties in a responsible manner, in the best interests of the beneficiary. Fiduciary bonds are sometimes referred to as “surety bonds,” “administrator bonds,” “conservator bonds,” “executor bonds,” or “trustee bonds.”

Many people assume that a fiduciary bond and fiduciary liability insurance are the same thing, but that is not correct. A fiduciary bond protects the beneficiaries’ assets against errors, omissions, and fraudulent practices of the fiduciary. Fiduciary liability insurance, on the other hand, protects the personal assets of the fiduciary in the event of legal action regarding his administration of the assets.

Obtaining a bond requires an application process in which the bonding agency checks the background and credit rating of the proposed fiduciary. Bonds are generally only issued to those who meet their underwriting criteria, and the higher the value of the assets, the more cautious the bond company will be in approving the fiduciary and issuing a bond.

Fiduciary Deed

A common task of certain types of fiduciary is to sell real property assets. In this case, the fiduciary has been given the authority to make such transactions on behalf of the beneficiary, including signing over property deeds. When the property is sold, a special Fiduciary Deed is prepared for the transfer of the property, and signed by the fiduciary rather than the property owner of record.

Related Legal Terms and Issues

  • Asset – an economic resource. Any tangible or intangible thing that is owned or controlled by a person or entity, having positive economic value.
  • Breach – a violation of, or failure to uphold, a promise, act, or contract. To act in a manner contrary to the terms or duties of an obligation.
  • Compensatory Damages – a sum of money awarded to the plaintiff in a civil lawsuit in compensation for injury, damages, or other loss resulting from the unlawful conduct or negligence of the defendant.
  • Punitive Damages – a sum of money awarded to the plaintiff in a civil lawsuit above and beyond what is necessary to compensate for actual losses. Also called “exemplary damages,” punitive damages are intended to punish the defendant for wrongful actions or omissions.
  • Sanctions – in a court proceeding, sanctions are punitive assessments for violation of a law, procedure, or court order. Although sanctions are most often in the form of monetary fines, other sanctions may include such punishment as loss of rights to make certain claims, or present certain evidence in trial. Sanctions may go so far as jail time for a ruling of Contempt of Court.
  • Trustor – an individual or entity that places assets and/or power in the hands of a fiduciary or trustee.