Oftentimes, in the business world, or in the legal world, one comes across terms that sound really complicated, and once you start to understand the terms and the concepts behind them, one then understands that said term isn’t all that difficult, and makes more sense. One such term that many people will eventually come across without much understanding of it is ‘fiduciary’ and ‘fiduciary duty’, which are essentially the same thing. In this blog post, we will explain the concept of fiduciary duty; what it is, what it pertains to, and where it can be used. In short, we will be discussing everything you need to know about fiduciary duty, and why is it used in whichever context it is usually used.
As stated beforehand, fiduciary duty is a common concept across two fields; business and law. And these two fields also tend to have some very industry-specific terminologies, but for fiduciary duty, it isn’t too much of a foreign or alien concept to understand. This is all you need to know about fiduciary duty; what it is, where is it applied, and how it works in both the business and the legal field.
Fiduciary Duty: what Is It?
Fiduciary duty can be simplified as a concept of ‘looking out for one’s interests, usually in the form of a client or a secondary party.’ What it means is that when one party has a fiduciary duty to the other, it makes the former party responsible for the interests of the former party. And fiduciary duty as a concept isn’t just restricted to interests; no, it goes beyond just legal or financial interests. In fact, fiduciary duty is extended to a lot of other domains and realms, and accepting legal responsibility for duties including care, loyalty, good faith and confidentiality are also included as a part of the concept of fiduciary duty.
While interests are certainly central to this idea and theme, the simple matter of fact with fiduciary duty is this: when the aspect of legality is invoked, it means that strict care must be taken to ensure that whatever interests are being served, do actually come first for the fiduciary party. For example, in business and finance, investment banks and funds have a fiduciary duty to their investors, which means that for them, the investor’s financial interests come first, and should a step be taken in obvious benefit of the investors, it would be characterised as an extension of their fiduciary duty to their investors.
Fiduciary Duty: The Legal Side
On the legal side of things, fiduciary duty can be described as a relationship based on the exclusive protection and serving of the interests of a party. A good example and characterisation of fiduciary duty in the legal realm would be attorney-client privilege, which presupposes that since an attorney is bound to protect their client’s legal interests, their conversations and all aspects of their involvement with each other must be kept out of the public realm. Similarly, the attorney or lawyer is always supposed to act in the best interests of their client, and whether it’s for them accepting a situation like a plea deal or any other result, the attorney is always bound, by the legal fiduciary duty, to act on the interests of the client, and to ensure their client understands that as well.
What Are The Types Of Fiduciary Duties?
There are many types of fiduciary duties, primarily depending on what the field in consideration is. From the legal realm to the business realm, these are the types of fiduciary duties most prevalent within both.
Duty of care: Duty of care might be slightly difficult to understand, but at its simplest, it essentially means exercising great caution and care, as well as sound judgment in ensuring that a beneficiary’s interests are always taken care of. Duty of care may also pertain to the ‘thoughtful consideration of options’ and the ‘sensible decision-making’ that is considered a part of a careful examination of the available information.
Duty of loyalty: As the concept may be rather simple to understand, duty of loyalty refers to the loyalty a fiduciary is supposed to have for their beneficiary. What duty of loyalty is that the fiduciary is supposed to act in the best interests of the beneficiary at all times, in all situations, and in situations where the best interest of the beneficiary may pose a conflict of interest with the fiduciary themselves, they are required to excuse themselves with prior information.
Duty of good faith: Duty of good faith essentially reminds the attorney or the executor of the estate that while the interests of the beneficiary reign supreme for them, there is an even more important and sovereign entity that trumps that as well, which is the law. This means that they should always act within the boundaries and constraints of the law while acting on behalf of their client’s interests. This also bars the fiduciary from taking actions that may violate the law while in the service of their client’s interests.
Duty of confidentiality: As explained beforehand with a much simpler concept of attorney-client privilege, the duty of confidentiality essentially ensures that the details, be they personal or otherwise, of the beneficiary must always be kept secret and confidential by the fiduciary, and this information should never be used by the fiduciary for their own personal gain.
Duty of prudence: Duty of prudence essentially asks the fiduciary to utilise their utmost in ensuring the best possible results in protecting their beneficiary’s interests. All decisions, matters and situations must be handled with the highest level of professional skill, caution and critical awareness of all risks involved in said situation.
Duty to disclose: As the name suggests, the duty to disclose means that whatever information that is prudent to be revealed to the beneficiary that may affect their interests should always be disclosed to them in a timely manner and that fiduciaries are expected to be completely forthright and forthcoming in their behaviour while dealing with the beneficiary’s interests.
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