What is a Fiduciary?

A certain presidential candidate recently used the term “fiduciary” when referring to his personal income taxes. I was confused. Fiduciary responsibility is not about personal taxes or finances. It’s about the legal obligation to act in the best interest of another party or organization. It’s about keeping a promise to use funds for a specific purpose.

 

Other listeners were probably as confused as I was when hearing “fiduciary” in a personal finance context. Three facts about fiduciary responsibility should clear up that confusion:

 

  1. Obligation to Act on Others’ Behalf

A fiduciary relationship is based on mutual faith and confidence between the individual(s) placing and accepting legal responsibility to serve the best interests of others. That includes the interests of individuals or an organization. The duties of a fiduciary include loyalty and reasonable care of assets in custody.

 

  1. Relationship Extends to All Actions

A fiduciary relationship extends to every possible case in which one party places confidence in the other party and such confidence is accepted. Placing and accepting confidence creates dependence by one party and influence by the other. The fiduciary is trusted by the dependent party to act in its best interest at all times.

 

  1. Scrutiny of Fiduciary Actions

Financial transactions between parties involved in a fiduciary relationship are subject to higher scrutiny. The spotlight on these transactions is due to the fiduciary’s dominant role that provides the capacity to profit or otherwise gain from financial decisions at the expense of the party under her or his influence.

 

It’s no wonder that these three facts will never be included in any political speech. They’re pretty dry stuff. Regardless, understanding these facts is important, whether you are accepting or placing confidence as part of a fiduciary relationship.