A fiduciary duty exists when a company or person is necessitated to put another party’s interests before their own. This duty arises from a relationship of confidence and trust, and in many cases, it is legally enforceable.
If you have a fiduciary duty to an individual or organization, it is crucial to understand the risks and scope inherent to this responsibility. Failure to uphold your fiduciary duty could expose you to personal liability and place your professional reputation at risk. Read on to learn more about fiduciary duty and the role it plays in business law.
What Is a Fiduciary?
A fiduciary refers to somebody who manages money or property on behalf of another person. Upon becoming a fiduciary, you are required by law to manage a person’s assets for their benefit and not for your advantage. When it comes to a fiduciary relationship, the individual needs to prioritize the interests of his/her clients over their personal interests, and as such, they are called the fiduciary. The principal or beneficiary refers to the person getting assistance or services.
Fiduciary relationships exist between clients and specific professionals such as financial advisors, lawyers, and doctors. Corporate board members and executives also have a fiduciary responsibility to act in the best interest of their businesses and shareholders.
3 Elements of Corporate Fiduciary Duty
In the sphere of business law, the responsibilities held by fiduciaries fall into three main categories. The directors and officers of a company are legally required to uphold the following duties:
- Duty of loyalty: The controllers should act in the company’s best interest without personal economic conflict. They may not prioritize their own personal gain above the needs or interests of the organization.
- Duty of care: Fiduciaries must consider all information available to make informed decisions for the company. When faced with a decision, they must be reasonably informed of all alternatives and can seek input from other advisors or employees.
- Duty of good faith: When making business decisions, fiduciaries must exercise care and prudence. In simple terms, they need to act in good faith.
What Is a Breach of Fiduciary Duty?
A fiduciary relationship is a serious obligation, and if you do not fulfill your duties as a fiduciary, you may be held legally liable. Fiduciary duty breaches occur when a fiduciary fails to uphold one of the above duties, thus compromising the fiduciary relationship with actions that are counterproductive or harmful to the client’s interests. Breaches of duty mainly occur when a fiduciary operates for their own financial gain or the financial interest of a third party rather than their own organization.
One important aspect of upholding fiduciary duty is the need to disclose potential conflicts of interest. If you fail to disclose potential conflicts, it can indicate a breach of duty, even if you did not take any action detrimental to the company.
Conclusion
If you are a fiduciary, it is essential to understand the scope of your duties and carefully uphold them. Likewise, if you are a client, employee, or shareholder with a relationship who has a relationship with a fiduciary, it is important to know what responsibilities are owed to you. If you have questions about this topic or are concerned about a potential breach of fiduciary duty, reach out to an experienced business attorney in your state.