Fiduciary Definition: Examples and Why They Are Important

Key takeaways
* A fiduciary is legally and ethically required to put another party’s interests ahead of their own.
* Common fiduciary duties include the duty of care, duty of loyalty, and duty to act in good faith.
* Fiduciary relationships appear across finance, law, corporate governance, and personal guardianship.
* Investment advisors are bound by a fiduciary standard; broker-dealers are subject to SEC Regulation Best Interest, a narrower duty at the time of recommendation.

What is a fiduciary?

A fiduciary is a person or organization entrusted to act on behalf of another (the principal or beneficiary) and required to place that party’s interests before their own. Fiduciary obligations are both ethical and legal and typically cover financial management, legal representation, and stewardship of assets or decisions.

Core fiduciary duties

Fiduciaries are commonly expected to:
* Duty of care — make informed, prudent decisions after reasonable investigation.
* Duty of loyalty — avoid conflicts of interest and not favor personal interests over the principal’s.
* Duty to act in good faith — choose options believed to best serve the beneficiary’s interests.

These duties may be ongoing (e.g., for investment advisors) or specific to a transaction (e.g., executing a property sale).

Common fiduciary relationships and examples

• Trustee and beneficiary — trustee holds legal title to assets in trust and must manage them for beneficiaries’ benefit (blind trusts are used to avoid conflicts).
• Corporate directors and shareholders — directors owe care, loyalty, and good-faith duties when making decisions that affect the company and its investors.
• Executor and legatee — executors administer estate assets for heirs and must disclose material facts and act impartially.
• Guardian and ward — guardians make decisions about a minor’s or incapacitated person’s welfare and finances.
• Attorney and client — attorneys must act with the highest level of fidelity, loyalty, and fairness to clients.
• Principal and agent — agents act on behalf of principals and must avoid conflicts that compromise the principal’s interests.
• Investment fiduciary — anyone legally responsible for managing another’s money (e.g., a volunteer on a charity investment committee).

Regulation: fiduciary standard vs. Regulation Best Interest (Reg BI)

• Investment advisors: Subject to the fiduciary standard under the Investment Advisers Act (duty of loyalty and care). These duties are continuous and require avoiding or disclosing and mitigating conflicts.
• Broker-dealers: Governed by SEC Regulation Best Interest (implemented 2019). Reg BI requires acting in a retail client’s best interest at the time of a recommendation, disclosing material conflicts, and exercising reasonable diligence, but it does not impose the full, ongoing fiduciary duties that apply to investment advisors. Reg BI still allows certain forms of compensation, such as commissions, with disclosure and mitigation requirements.

Brief regulatory history

Efforts to broaden fiduciary obligations for retirement account advice (e.g., Department of Labor proposals) have faced legal and political challenges. The regulatory landscape continues to evolve, especially for retirement advice and conflicted transactions.

Risks and misconduct

• Fiduciary risk — poor decisions or excessive costs that reduce beneficiary value (e.g., excessive trading that increases fees).
• Fiduciary abuse/fraud — using a position of trust for personal gain, illegal or unethical conduct that benefits the fiduciary at the principal’s expense.

Fiduciary insurance

Fiduciary liability insurance protects individuals (e.g., trustees, corporate directors) and organizations against claims of mismanagement, administrative errors, or breaches of fiduciary duty related to employee benefit plans and investment decisions.

Practical investment fiduciary guidelines

A commonly used framework for investment fiduciaries:
1. Organize — understand applicable laws, define roles and responsibilities, document service agreements.
2. Formalize — set goals, risk tolerance, time horizon, asset allocation, and write an investment policy statement.
3. Execute — conduct documented due diligence when selecting investments or managers; use advisors where needed but monitor their work.
4. Monitor — regularly review performance against benchmarks, reassess managers and organizational changes, and ensure fees are fair and reasonable.

How fiduciary duties influence investment strategy

Fiduciary responsibilities encourage consideration of long-term risks and alignment with beneficiaries’ goals. This can lead to integrating factors like sustainability (ESG) where they materially affect risk/return or match client values, while still focusing on prudence and performance.

Why hire a fiduciary?

Working with a fiduciary reduces the risk of conflicted advice, aggressive sales tactics, or decisions that favor the advisor over the client. Fiduciaries are legally bound to prioritize your interests and to document and justify material decisions.

Bottom line

Fiduciaries play a central role whenever one party is entrusted with another’s assets, rights, or welfare. Understanding fiduciary duties, the types of relationships that create them, and the regulatory distinctions that apply in finance helps principals choose trusted advisers and hold them accountable.