What Is a Fiduciary Duty? Examples and Types Explained

What Is a Fiduciary Duty?

A fiduciary accepts legal responsibility for duties of care, loyalty, good faith, confidentiality, and more when serving the best interests of a beneficiary. Fiduciary duty refers to the relationship between the fiduciary and the principal or beneficiary on whose behalf the fiduciary acts. Strict care must be taken to ensure that no conflict of interest arises to jeopardize those interests.

Examples of Fiduciary Relationships

Trustee/Beneficiary

A single parent with young children might create a living trust to administer the assets that the children would inherit should the parent die while the children are still underage. The parent will name a person or an entity, such as a law firm or bank, as trustee to manage the trust. That person or entity has a fiduciary duty to the children who are the beneficiaries of the estate.

The fiduciary/trustee has legal ownership of the property and controls the assets held in the trust in a trustee/beneficiary relationship. As fiduciary, the trustee must make decisions that are in the best interest of the beneficiary who holds equitable title to the property. The trustee/beneficiary relationship is an important aspect of comprehensive estate planning. Special care should be taken to determine who is designated as trustee.

Guardian/Ward

An adult is designated as the legal guardian of a minor child in a guardian/ward relationship. As the fiduciary, the guardian is tasked with ensuring that all matters related to the daily welfare of the child are dealt with responsibly and in the best interests of the child. This care can include deciding where the child will attend school, arranging for health care, and providing an allowance.

A guardian may be appointed by a state court when a parent dies or is unable to care for the child for other reasons. The guardian/ward relationship remains intact in most states until the minor child reaches adulthood.

Agent/Principal

Any person, corporation, partnership, or government agency might be called upon to act as agent without conflict of interest on behalf of a principal. A common example of an agent/principal relationship that implies fiduciary duty is the one between the executives of a company and its shareholders. The shareholders expect that the executives will make well-considered, prudent decisions on their behalf and in their best interests as owners.

A similar fiduciary relationship exists between personal investors and the fund managers they select to manage their assets.

Attorney/Client

The agreement between an attorney and a client is arguably one of the most stringent of fiduciary relationships. The U.S. Supreme Court has stated that the highest level of trust and confidence must exist between an attorney and a client. As a fiduciary, an attorney must act with fairness, loyalty, care, and within the law on behalf of the client.

Attorneys can be sued by clients for breaches of their fiduciary duties. They're accountable to the court in which a client is represented when a breach occurs.

Controlling Stockholder/Company

Fiduciary duties may be required of a stockholder in certain circumstances when they possess a majority interest in a corporation or exercise control over its activities. A breach of fiduciary duty may result in personal legal liability for the controlling shareholder as well as for directors and officers.

Types of Fiduciary Duties

Fiduciary duties may differ depending on the type of beneficiary that a fiduciary serves. However, the legal and ethical obligations related to protecting the interests of beneficiaries generally include the following duties.

Duty of Care

Duty of care is the responsibility to inform oneself as completely as possible to exercise sound judgments that protect a beneficiary's interests. It can involve the thoughtful consideration of options and sensible decision-making that's based on a careful examination of available information.

Duty of Loyalty

This pertains to acting in the best interest of the beneficiary at all times, putting their well-being first and foremost. It includes the duty of the fiduciary to excuse themself from taking any actions when there's a conflict of interest with the beneficiary's welfare.

Duty of Good Faith

This duty pertains to always acting within the law to advance the interests of the beneficiary. At no time should the fiduciary take actions that are outside legal constraints.

Duty of Confidentiality

A fiduciary must maintain the confidentiality of all information relating to the beneficiary. They must not use any form of it, whether written or spoken, for their personal gain.

Duty of Prudence

Fiduciaries must administer matters and make decisions concerning the interests of beneficiaries with the highest degree of professional skill, caution, and critical awareness of risk.

Duty to Disclose

Fiduciaries must engage in completely forthright behavior. They must disclose all relevant information that could have an impact on their ability to carry out their duties as fiduciaries and/or on the well-being of their beneficiary's interests.

Breaches in Fiduciary Duty

Fiduciary duties are taken on by individuals and entities for various types of beneficiaries. Such relationships include lawyers acting for clients, company executives acting for stockholders, guardians acting for their wards, financial advisers acting for investors, and trustees acting for estate beneficiaries.

An employee may even have a fiduciary duty to an employer. Employers have a right to expect that employees are acting in their best interests. They're not sharing trade secrets, using company equipment for personal purposes, or stealing customers from a competitor.

Case law indicates that breaches of fiduciary duty most often occur when a binding fiduciary relationship is in effect and actions are taken which violate or are counterproductive to the interests of a specific beneficiary. The inappropriate actions are typically alleged to have benefitted the fiduciary's interests or the interests of a third party rather than a principal's or beneficiary's interests.

A breach stems from a fiduciary's failure to provide important information to a client in some cases. This leads to misunderstandings, misinterpretations, or misguided advice.

Disclosure of any potential conflict of interest is important in a fiduciary relationship because any conflict can be seen as a cause for a breach of trust.

Consequences of a Fiduciary Breach

A breach of fiduciary duty can lead to several consequences. Not all of them are legal consequences.

1. An accusation of a breach of fiduciary duty can hurt the reputation of a professional. A client can end a professional relationship because they don't trust in a professional’s care of the required fiduciary duty.
2. Steeper consequences can result if a breach of duty case proceeds to the courts. A successful breach of fiduciary duty lawsuit can result in monetary penalties for direct damages, indirect damages, and legal costs.
3. A court ruling can also lead to industry discrediting, the loss of a license, or removal from service.

Proving a breach of fiduciary duty isn't always easy, however.

Elements of a Fiduciary Breach Claim

Several legal precedents and elements have been established to allow claims by those who have been harmed by a breach of fiduciary duty. Jurisdictions differ but the following four elements are generally essential if a plaintiff is to prevail in a breach of fiduciary duty claim.

A Duty Existed

The plaintiff must show that a legal fiduciary relationship and duty existed. Many professionals are legally and ethically obligated to conduct their businesses honestly but this doesn't necessarily mean that they're fiduciaries who must act solely in the interest of a particular client. A fiduciary duty is accepted as such by a fiduciary, typically in writing.

A Breach Occurred

The plaintiff must show that a fiduciary duty was breached. The type of breach varies. An accountant may be guilty of a breach of fiduciary duty if they were sloppy in filling out a client's tax return and the client was slapped with an enormous fine for nonpayment. But no breach would have occurred if the client was sloppy and failed to provide complete and necessary information.

Damage Was Sustained

The plaintiff must show that the breach of trust caused actual damage. There's usually no basis for a breach of fiduciary duty case without damage. The more specific a principal or beneficiary can be with facts and proof of damage, the better.

A trustee might be sued for selling a beneficiary's property too cheaply. It's clearly a conflict of interest if the buyer was a relative of the trustee. A specific accounting relating to the loss to the beneficiary is necessary to prove a breach of fiduciary duty.

Causation Was Proved

Causation shows that any damages incurred by the plaintiff were directly linked with the actions taken in breach of fiduciary duty. In the example of a property sale, the link appears to be clear but the trustee might argue that a quick sale was in the best interest of the beneficiary and that no other buyer was interested.

Examples of Fiduciary Breach Cases

A Duty of Loyalty

This example of a breach of fiduciary duty went to the Virginia Supreme Court in 2007.

A lighting manufacturer and supplier sued a former employee in "Banks v. Mario Industries of Virginia, Inc." They claimed that the employee had established a directly competing business by allegedly using proprietary information acquired in their previous employment.

The manufacturer didn't require its employees to sign a non-compete or confidentiality clause but the company handbook outlined related policies. The question of whether the employees had a fiduciary duty to their former employer and had breached it was fundamental to the appeal that brought the case to the state's highest court.

The court affirmed the lower court's ruling that the employees owed Mario a duty of loyalty. It effectively supported the claim of a breach of fiduciary duty and imposed a penalty of more than $1 million.

A Menswear Store vs. Ex-Employees

A high-end menswear store cited a breach of fiduciary duty in 2006 when it sued two of its former sales professionals for taking a job with a competitor, Saks Fifth Avenue. The department store was able to prove that it suffered actual losses after the salesmen left. The court ruled that the losses could not be attributed directly to the actions of its former employees and the suit failed.

Aiding and Abetting a Breach of Duty

A comptroller for a corporation embezzled $15 million from their employer by writing checks against their company's bank account and depositing them into another account at their own bank. The company sued the bank that took the deposits, alleging that it had aided and abetted a breach of fiduciary duty. The court ruled that there was insufficient evidence that the bank was aware of its role in the scam.

The Bottom Line

Fiduciary duties refer to how a fiduciary is legally committed to act for a principal or beneficiary. They include a duty of loyalty, a duty of care, a duty of prudence, and a duty of confidentiality.

Fiduciary duties are meant to ensure that the fiduciary acts only in the best interests of a principal or beneficiary. The fiduciary must act diligently to protect those interests.

You should always expect a high standard of care from a fiduciary but you can protect yourself by understanding the rights that this relationship grants you and the responsibilities that are not part of a fiduciary's duties.