What is a fiduciary?

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A fiduciary is someone who has the responsibility of managing, holding or administering money or property for another person, known as the principal. Fiduciaries are responsible for the integrity of what is entrusted to them and are held accountable to those they serve under this duty.

Fiduciary duty is a legal obligation, and those who choose to act as fiduciaries must do so with the utmost integrity and honesty toward those they serve. Failing to uphold this duty can trigger serious consequences for those who are at fault, including civil and criminal charges.

Examples of fiduciaries

The definition of a fiduciary can be further broken down into three categories: medical, legal and investment. Each category has its own specific set of responsibilities that come with being a fiduciary. For example, in the investment world, fiduciaries are responsible for making sound investment decisions that will best benefit their clients. On the other hand, legal fiduciaries are expected to follow their client’s instructions when carrying out specific actions.

1. Medical fiduciary

A fiduciary in the medical field makes decisions on behalf of patients who are deemed incapable of taking care of themselves. For example, a medical fiduciary over an individual can be necessary when that person is unable to make medical decisions on their own. 

Medical fiduciaries are often appointed by a court to protect the interests of a patient who is unable to do so themselves. This can include children, incapacitated adults or even pets. A medical fiduciary is typically appointed when there is a need for someone to oversee and manage the medical affairs of a patient.

2. Legal fiduciary

In the legal world, a fiduciary is someone who has the responsibility of holding property as its owner’s representative. In addition to managing someone else’s money, a fiduciary is responsible for protecting those funds from losses, as well as maintaining the confidentiality of information.

One example of a legal fiduciary would be a proxy, also known as a power of attorney, who would be a lawyer hired by a corporation’s board of directors to serve as an outside counsel to the company. The attorney, in this case, has been given some discretionary authority over what actions should be taken and the methods used while fulfilling the responsibilities held within his or her position.

3. Investment fiduciary

An investment fiduciary is a person who has been entrusted to manage another person’s money with the intention of earning a return on that investment. Fiduciaries in this area are responsible for making sound investment decisions that will best benefit their clients. They must always act in the client’s best interests and are prohibited from engaging in any transactions that would benefit themselves at the expense of their clients.

Investment fiduciaries include financial advisors, stockbrokers and wealth managers. They work with a variety of investments, such as stocks, bonds, mutual funds and real estate. In order to protect their clients, investment fiduciaries are held to a high standard of care. This means they must always act with the utmost prudence, fairness and loyalty to the client. A breach of these duties can land investment fiduciaries in civil or criminal court.

Finally, as a financial fiduciary, it is their responsibility to choose investments that will benefit their clients and put aside any self-interests they may have. For example, an investment advisor who works at a wealth management firm cannot place his/her own interests ahead of those of their clients by investing money into assets he or she knows will not be successful, regardless of the benefit to his company.

Final thoughts

Fiduciaries are people who have gained another’s trust and must act in the best interest of their principal. These people are put into their positions because they are assumed to be the most trustworthy. However, the U.S. Department of Labor recognizes that there may be problems with this system and is suggesting legislation to protect the public. And in many cases (i.e. legal, or financial), we choose our own fiduciaries, so, it’s best to pick wisely.  

Rick Orford is a Wall Street Journal, USA Today, and Amazon best-selling author, investor, and mentor. He’s appeared on Good Morning America and has been featured in the Washington Post, Yahoo Finance, MSN, Insider, and more. His passion is personal finance, and he works tirelessly to deliver content in an easy-to-understand manner.

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