Legal Definitions - fiduciary relationship

A fiduciary relationship is a special legal connection where one person or entity (the "fiduciary") is obligated to act solely in the best interests of another person or entity (the "beneficiary" or "principal"). This relationship is built on trust, confidence, and often an imbalance of power or knowledge, requiring the fiduciary to prioritize the other party's welfare above their own in matters within the scope of the relationship.

Here are some examples illustrating a fiduciary relationship:

• Example 1: A Financial Advisor and Their Client

  Imagine a client hires a financial advisor to manage their investment portfolio for retirement. The financial advisor has access to the client's funds and makes decisions about where to invest them. In this scenario, the financial advisor is the fiduciary, and the client is the beneficiary. The advisor is legally bound to recommend investments that are genuinely in the client's best financial interest, even if those investments offer lower commissions to the advisor. They cannot prioritize their own earnings or other interests over the client's financial well-being.

• Example 2: A Trustee and a Trust Beneficiary

  Consider a situation where a parent establishes a trust fund for their minor child's future education, appointing a trusted family member as the trustee. The family member (trustee) is now responsible for managing the assets within the trust. They owe a fiduciary duty to the child (beneficiary). This means the trustee must manage the funds prudently, make sound investment decisions, and ensure the money is used exclusively for the child's education and other specified needs, as outlined in the trust document. The trustee cannot use the funds for their personal benefit or make risky investments that could jeopardize the child's future.

• Example 3: A Corporate Board of Directors and Shareholders

  When a company is publicly traded, its board of directors makes significant decisions regarding the company's operations, strategy, and financial health. Each director on the board owes a fiduciary duty to the company and its shareholders. This means they must act in good faith and with reasonable care, making decisions that they believe are in the best long-term interest of the company and its owners (the shareholders). For instance, they cannot approve a merger or executive compensation package solely because it benefits their personal stock holdings or relationships if it is detrimental to the company's overall value or the interests of the broader shareholder base.