How a Fiduciary Relationship Works
A fiduciary is a legal relationship where an individual, association, corporation, or another party has the legal authority and duty to make decisions on behalf of another party regarding financial issues. This fiduciary relationship is between a principal and a fiduciary.
In a fiduciary relationship, one party is in a vulnerable position and reposes good faith, confidence, trust, and reliance in another party whose participation, advice, aid, or protection is desired for whatever reason. In this sort of relationship, the fiduciary must act in good conscious for the sole interest and benefit of the other party, while maintaining loyalty to the interests.
The most common fiduciary relationships are between a beneficiary and a trustee, but can also include those of a corporate director with a trustee, or a legal guardian with a conservator. Other examples include:
• Broker and a principal
• Client and a lawyer
• Partner with a partner
• Stock subscriber and a promoter
• Patient and a doctor
• Student and a teacher
• Parishioner and a priest
In certain situations, a fiduciary may have to file with a judge or a probate court a probate bond or a fiduciary bond. The purpose of this is to guarantee that the fiduciary will be faithful to his duties. The fiduciary must be accountable for his actions and cannot profit or benefit from the relationship in certain ways. The profit or benefit cannot be benefited through:
• An action that is a conflict of duty, whether or not it is a duty to another
• An action that takes advantage of the position of the fiduciary
Because of this, the fiduciary must be in a situation where fiduciary obligations and personal interests do not conflict. Unless there is previous consent and knowledge, a fiduciary should not profit or have a conflict of interest.
In certain circumstances, there is a potential conflict between two fiduciary duties, for example when a lawyer represents two different clients with different and opposing interests. This situation is not allowed to happen in a fiduciary duty.
In the case that a fiduciary does not complete his obligations, his conduct may be considered constructive fraud despite the lack of primary fraudulent actions. In these situations, courts will often returned the benefit that was given to the fiduciary to the principal unless the fiduciary can somehow show that the conflict had been fully disclosed and the principle consented to the actions of the fiduciary.