Fiduciary Duties and Relationships Explained

What is fiduciary duty?

Fiduciary duty also referred to as fiduciary service, is the responsibility a person or organisation is entrusted with to manage and control money and property belonging to other parties such as an individual, company, or organisation.

The term fiduciary originates from the word ‘fidere’ in Latin, meaning ‘to trust.’

The Merriam-Webster Dictionary explains the original meaning of fiduciary as follows: ‘Fiduciary relationships often concern money, but the word fiduciary does not, in and of itself, suggest financial matters. Rather, fiduciary applies to any situation in which one person justifiably places confidence and trust in someone else and seeks that person’s help or advice in some matter.’ (Accentuation by the article writer)

Black’s Law Dictionary defines fiduciary duty as ‘a duty of utmost good faith, trust, confidence, and candor owed by a fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer’s client or a shareholder); a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person.’

Observing the definition in Black’s Law Dictionary, the following attributes are required to perform fiduciary duties:

• Good faith: To act in a sincere and honest way (Latin: bona fides)
• Trust: To rely on the character, integrity, strength, and honesty of a person. A trustworthy person is someone who can be trusted and will never betray the trust and confidence of others.
• Confidence: A feeling of trust in the reliability and ability of a person.
• Candour (candor): The quality of speaking openly, honestly, and sincerely about difficult subjects.
• Honesty: The quality of being honest, meaning always telling the truth (i.e., never lying), not deceiving or cheating others, and not trying to break the law.
• Loyalty: The quality of being faithful to someone and to commitments and obligations.

What is a fiduciary?

A fiduciary is a person or organisation who acts in a fiduciary capacity to whom authority is entrusted for the benefit of another person or an organisation. Mostly, a fiduciary act in relation to financial matters on behalf of another person or an organisation.

A fiduciary is both ethically and legally bound to act in the best interest of another person or persons.

In legal terms, the requirement to act in the best interest of someone else is referred to as the prudent person rule, also known as the prudent man rule, which is described by the Merriam-Webster Dictionary as: ‘A rule giving discretion to a fiduciary and especially a trustee to manage another’s affairs and invest another’s money with such skill and care as a person of ordinary prudence and intelligence would use in managing his or her own affairs or investments.’ (Accentuation by the article writer)

Express differently, the prudent person rule requires that a fiduciary be obliged to act primarily with the needs of beneficiaries in mind, ensuring that no conflict of interest occurs between the fiduciary and the beneficiary.

Usually, fiduciaries are compensated for the fiduciary duties they perform.

What is a fiduciary relationship?

A fiduciary relationship implies a relationship between a fiduciary and the client or party whose assets, money, or property are managed by the fiduciary.

The term ‘the principal’ is used to describe a client of a beneficiary in general terms.

Fiduciaries as well as principals can be described with different names, depending on the nature of the relationship and the fiduciary duties involved. The following list indicates five of the fiduciary relationships which will be explained:

Fiduciary relationship between trustee and trustor

A trustor is a term used in estate planning to indicate a person or legal entity who creates a trust which is a fiduciary arrangement in which the trustor selects a trustee or trustees to, amongst other duties:

• Manage the affairs of the trust efficiently.
• Manage and control the assets of the trust, entrusted with the authority to handle the assets held in the name of the trust.

Trusts are created to provide legal protection for the assets of the trustor, ensuring that the assets are distributed according to the instructions of the trustor.

Additional to the appointment of trustees, a trustor decides what assets will be included in the trust, designates beneficiaries, and indicates how they will benefit from the trust.

A trustor is also referred to as a grantor or settlor.

Fiduciary relationship between trustee and beneficiary

A trustee appointed by a trustor is required to perform a fiduciary responsibility, acting in the best interest of the beneficiaries.

During the duration of the trust, the trustee holds legal title to the property in the trust, while the beneficiaries hold equitable title to the property in the trust. This means that the trustee holds property (or assets) in the trust on behalf of a beneficiary or beneficiaries.

In legal terms, the legal title indicates the actual ownership of the property which includes the duties and responsibilities with regard to the maintaining, using, and controlling of the property. A trustee holds legal title to the property in the trust until the date when the property is transferred to one or more beneficiaries.

The equitable title refers to the right to use the property and benefit from it. This means, inter alia, that a beneficiary has the right to any increases in value generated by the appreciation of the property during the duration of the trust.

Equitable ownership is not ownership in the true sense of the word, meaning a beneficiary cannot argue that he or she is the legal owner of the property until the property in the trust is transferred to him or her.

Fiduciary relationship between attorney/lawyer and client

Not all fiduciary relationships exist in terms of financial aspects. For example, an attorney may not necessarily represent a client to protect his or her financial assets.

When representing a client, an attorney is required to maintain the highest level of trust and confidence.

In the world of law, the foundation for an ethical and legal fiduciary relationship between lawyer and client comprises qualities such as effective communication, confidentiality, avoidance of conflict, and competence.

• Effective communication

An attorney must provide a client with enough information to enable him or her to make sound decisions.

Effective communication includes, inter alia, the following:

• Regular and informative communication, explaining all the relevant facts, the advantages, and the disadvantages of different scenarios.
• Keeping the client updated on any developments regarding his or her legal affairs.
• Being available to answer questions and or find solutions to problems (anticipated and unforeseen).

• Confidentiality

A lawyer-client relationship usually implies confidentiality. Clients trust a lawyer with confidential information that would embarrass them or cause them legal troubles if it was publicly known.

A lawyer is not allowed to reveal confidential information about clients unless the client gives informed consent.

Lawyers are not permitted to discuss information concerning their clients even informally. Additionally, if the information is obtained from a source other than the client, the lawyer is not allowed to reveal it.

However, there are circumstances or exceptions when an attorney may be permitted or required to disclose a client’s confidential information without the client’s consent. DSC Attorneys (a law firm in Cape Town) list the following circumstances/exceptions on its website:

• to prevent reasonably certain death or substantial body harm
• to prevent a client’s crime or fraud that is “reasonably certain” to substantially injure another’s property of finances
• to “prevent, mitigate, or rectify” a “reasonably certain” substantial property of financial injury to another
• to obtain ethics advice
• to establish a claim or defence on behalf of the lawyer
• to comply with order law or a court order
• to identify and resolve conflicts of interest related to a lawyer’s change of employment.

• Avoidance of conflict

An attorney must avoid entering into a fiduciary relationship that would create a conflict of interest.

A conflict of interest refers to a situation where there is a conflict between the private interests and the official responsibilities, or professional duties, of a person in a position of trust.

Conflicts of interest are often complicated and can be difficult to perceive and even the appearance of a conflict can cause problems for a fiduciary.

Examples of conflict of interest are:

• Presenting a client in business issues and taking on another client with opposing interests. For example, when both clients are competing for the same contract.
• Self-dealing occurs when an attorney takes advantage of his or her position in a transaction, acting in his or own interest, rather than in the best interest of the client. (Noteworthy, self-dealing can occur in any type of fiduciary relationship. For instance, a trustee making a profit from the way he or she manages the assets of a trust.)
• Another example of representing clients with differing interests simultaneously is when representing both parties in a divorce case.
• A conflict where a third party is involved. For example, a lawyer represents a wife in a case of domestic abuse by her husband and whose legal fees are being paid for by the husband.

• Competence

Attorneys are obliged to use their legal knowledge and skills on behalf of their clients. Thoroughness and dedicated preparation are necessary to serve the interests of clients.

Fiduciary relationship between the financial advisor and client

Financial advisor (also spelled adviser) is a generic term that includes advisors providing several types of services, such as financial planning, estate planning, retirement planning, investment management, tax planning, portfolio management, and insurance advice.

Nowadays, financial advisors provide an all-embracing service, comprising all the services mentioned above.

Financial advisors are required to provide financial guidance and financial advice, minimise conflicts of interest, be transparent, and honour the trust placed in them.

SmartAsset, a financial technology company, mentions that fiduciary financial advisors are required to:

• Put their clients’ best interests before their own, seeking the best prices and terms.
• Act in good faith and provide all relevant facts to clients.
• Avoid conflicts of interest and disclose any potential conflicts of interest to clients.
• Do their best to ensure the advice they provide is accurate and thorough.
• Avoid using a client’s assets to benefit themselves, such as purchasing securities for their own account before buying them for a client.

In addition, a financial advisor must annually compile a financial needs analysis (FNA) for a client, analysing the client’s current financial situation, his or her future financial needs and goals, and what the client needs to do to reach his or her financial goals.

Fiduciary relationship between legal guardian and ward of the court

A legal guardian, commonly referred to as a guardian, is a person appointed and authorised by a court to make decisions concerning, inter alia, the protection, daily welfare, and care of a ward of court.

A ward of the court, also known as a legal ward, refers to a minor (child) or a person incapacitated and legally incapable of managing his or her own affairs, for example, an elderly person.

A legal guardian has a fiduciary duty to act in the best interest of the legal ward. For example, to oversee the welfare and safety of the ward of court.

A guardian must take his or her ward’s preferences into consideration while making decisions about his or her safety, comfort, and needs.

While managing the ward’s finances, the guardian is obliged to use the money in such a way that the ward will benefit from the guardian’s decisions. Under no circumstances the guardian is allowed to benefit from money assigned to ensure the welfare of a ward of court.