What is a Fiduciary Anyway?

The term fiduciary has been tossed around frequently in recent years. Consumers know that it’s a good thing to be a fiduciary and to work with one, but they do not necessarily understand the core meaning of this word and how it applies to the financial advice industry (a topic I’ll cover in my next post). In this week’s post, I provide some essential information on this nebulous term to clear up the confusion.

Fiduciary 101

The root of the word fiduciary is fidere, which is Latin for trust. That is the core principle of all fiduciaries: to foster trust. This usually means creating a professional relationship with another person that is based in trust.

Fiduciary relationships can occur across organizations and industries. In fact, they can be found wherever someone places trust in another to guide them or act on their behalf. Doctors and patients, conservators and beneficiaries, lawyers and clients, corporate boards and stakeholders, and (of course) financial advisors and individual investors are all examples of fiduciary relationships. In each of these examples, trust is necessary for the relationship to work in a fair and equitable way.

The reason trust is essential in these partnerships is because one group holds the power (i.e., the knowledge), while the other group is at the mercy of their decision-making. For example, when a lawyer provides guidance to a client, that client assumes the lawyer is acting in their best interests and not attempting to fool or cheat them. They also assume the lawyer doesn’t have conflicts of interest (such as a vested interest in the “other side” winning in court).

Fiduciary Obligations

At the core of the fiduciary relationship are two main obligations: the duty of loyalty and the duty of care. Essentially, the duty of loyalty means that the fiduciary (the one with the power) will act in their clients’ best interests at all times and will do their best to avoid or mitigate conflicts of interest. The duty of care requires a fiduciary to proceed with caution, diligence, and care. In other words, they must be competent and informed enough to make good decisions on behalf of their client.

These essential duties (loyalty and care) are the backbone of a fiduciary’s obligations. However, other duties often crop up that are associated with being a trustworthyfiduciary, such as the duty of disclosure (disclosing all relevant information) or the duty of confidentiality (protecting private and/or sensitive information).

But despite all these duties and guidelines, fiduciaries might come across some legal gray areas that simply require them to use their moral compass as a guide. Because of this, it is vitally important for the beneficiary (or client) to completely trust their fiduciary. They need to be assured that this person will act in their best interests and will have good enough judgment to understand what “bests interests” means for their particular situation.

In my next blog post I’ll expand the conversation on fiduciaries further and apply these principles to financial advisors (and the financial advice industry). Stay tuned!