Fiduciary relationship: how to avoid a break-up

The golden rule to maintaining any business relationship is trust, which underpins the duties owed by one individual to another within a fiduciary relationship. This type of business relationship is formed when one person is put in a position of trust and confidence, to act in the best interests of the other party. You’ve most likely heard of the most common example of the classic trustee and beneficiary relationship, but there are many more. This Business Kitz article will dive into what exactly a fiduciary relationship entails, the duties of a fiduciary and how these duties are breached. 

What is a fiduciary relationship? 

A fiduciary relationship is when one party, the fiduciary, is nominated to act on behalf of another, the principal, usually when there is management of equity and/or assets, such as property. As a fiduciary, along with the responsibilities that come with your job, your fiduciary duties are to act in good faith and place the interests of the other party above your own; this requirement is enforceable under a court of law and could present significant issues should you do otherwise. A healthy fiduciary relationship is based on mutual trust and acting with loyalty to the principal party, such as investing in funds or entering an agreement that will provide benefit to your client. 

Some examples of fiduciary relationships include: 

  • Director and company 
  • Agent and principal 
  • Partners in a joint venture
  • Solicitor and client
  • Employer and employee
  • Doctor and patient 
  • An executor of a will and the beneficiaries

Making it official: the duties and paperwork 

Apart from the general expectations and duty to act in the best interest of the principal, there are two set duties in a fiduciary relationship. These are:

  1. Duty of care: A fiduciary owes a duty of care to the other party in the relationship and should conduct in-depth research, exercise caution with business activities and carefully manage the assets they have control over. 
  1. Duty of loyalty: A fiduciary is obligated to act with loyalty to the principal and not conduct business for personal or economic gain. There should be no conflict of interest when entering into a contract; being on a company board should not be a method of securing some extra funds to fuel an online shopping addiction. 

If you have been placed in the role as a fiduciary whether it be as a trustee, executor, or other title, it is required that you notify the Internal Revenue Service (IRS). This should be done by filing the Notice Concerning Fiduciary Relationship form and detailing the start and end date to the fiduciary relationship. 

What is a breach of a fiduciary duty?

Fiduciary duty is breached when the duties of care and loyalty are not upheld. An example would be if some assets were not accounted for or if an investment was made to a fund that the fiduciary would personally benefit from. In basic terms, the cause of a breach of fiduciary duty is generally when there are conflicts of interest and something is not done for the ‘good’ of the company or client, but for a personal benefit. When seeking court remedies it is important to be aware of the terms set out in your contract and whether there was informed consent from the principal or not. 

Legal advice

It is important to know how to create a healthy fiduciary relationship and carry out your duties to maximise long-term profitability and a high level of trust in the management of your business, finances or assets. If you are forming a fiduciary or business relationship and are drafting contracts, Business Kitz has a variety of customisable templates for you to use! If you have any legal concerns, our sister company, Legal Kitz, can assist you. You can book a free 30-minute consultation with their experienced and highly qualified team via our website now. 

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