What you Need to Know About Fiduciary Relationships in Business

You may have oftentimes heard the term “fiduciary,” particularly with respect to relationships involving money. Fiduciary relationships, however, extend far beyond monied situations into just about every aspect of business. At their core, fiduciary relationships are ones of trust.

It is fitting, then, that the term “fiduciary” derives from the Latin fiducia which means “trust.” In modern legal parlance, a fiduciary relationship exists between a party who has the legal or ethical obligation of trust (the fiduciary) to act for the benefit of another party or parties (the beneficiary). A fiduciary relationship carries the highest standard of care on the part of the fiduciary to the beneficiary. This is because the law recognizes that fiduciaries are not allowed to benefit from their fiduciary relationship and thus, they have no economic incentive to fulfill their obligations. Thus, the law steps in and creates an incentive in the form of the highest duty of care that if breached, will cost the fiduciary dearly.

The business world is full of fiduciary relationships, some of which are obvious and others, not so much. Perhaps one of the best known fiduciary relationships in business is that of partners to each other, that of directors to the corporation, and that of a corporation to its shareholders. In each case, the fiduciary owes a duty to the beneficiary to act in the beneficiary’s best interest only, and not at all in the interest of the fiduciary. This is why accusations of directors acting on their own interests rather than those of the corporation are litigated – the breach of that highest standard of care is incredibly serious.

Other fiduciary relationships found in the business world include those between a client and their professional, such as attorney/client. In the attorney/client relationship, the attorney is absolutely the fiduciary of the client and must act with complete fairness and loyalty to the client in all dealings. Accountants and CPAs can also be found to be fiduciaries for their clients. Even stockbrokers and real estate agents are held to fiduciary standards, since again, theirs is a position of trust to work on behalf of another party.

Just as there are a myriad of relationships that are considered fiduciary, there are a myriad of ways in which these relationships can be breached, broken, or violated. The most common breaches of fiduciary duty in the business context involve fiduciaries who do not act in the best interest of their beneficiary and engage in self-dealing, i.e. getting involved in relationships that constitute a conflict of interest with the duty to the beneficiary or take advantage of the relationship to obtain other business dealings.

In fiduciary relationships involving professionals, such as attorneys, accountants, and stockbrokers, breaches can include neglect, failure to act, and acting without the requisite skill required, including mismanagement. More serious breaches include violating confidentiality, using information gained from client to the benefit of the professional, and theft or misappropriation of property or funds. These are just a few examples.

Just about everyone engaged in some form of business is in a fiduciary relationship, either as the fiduciary or as the beneficiary. Many are in several fiduciary relationships, sometimes as the fiduciary and sometimes as the beneficiary. Thus, it is imperative to understand fiduciary relationships and the rights and responsibilities of any party in either end of the relationship. If you have further questions about fiduciary relationships in business, contact the Trembly Law Firm assist with your individual business questions or issues.