Fiduciary

A Fiduciary is a person or entity that is legally and ethically obligated to act in the best interest of their client- even in cases whereby doing so disadvantages the fiduciary. Although the use of fiduciaries is not restricted to financial affairs, they will most commonly be encountered in the field of financial planning, and in particular the fields of trust and pensions administration, and financial advisory.

Historically financial relationships were based on trust and honor and were not codified in law. In the modern world developed countries have robust laws and exacting standards for their fiduciaries to ensure that their clients are served appropriately. At the core of the fiduciary responsibility is the concept of the “prudent man”. As a fiduciary could conceivably be in an endless number of scenarios in which they have to make a decision for their client,  the prudent man rules serve as a decision making framework for a hypothetical “prudent man” who exercises discretion fairly and expertly. Fiduciaries have a legal obligation to act prudently, and when it can be proven that a fiduciary did not act prudently, or worse, acted against the interests of their client, they will be subject to civil penalties. With reference to trust and pension plan administration, the conditions of the fiduciary responsibility of the administrator will commonly be more specific and may discuss fees, investment allocation and conflict of interest policies.

The trustee of Mr. Client’s occupational pension plan from the company where he worked in his late 50’s has a fiduciary responsibility towards the plan participants. Failure to diversify the investments of the plan, assuming too much risk, choosing poor investments, charging too much in fees or failing to disclosure and remedy conflicts of interest among other things, are all grounds for dismissal. Failure to exercise prudence opens up the plan administrator to the threat of civil litigation by the plan participants, and in some jurisdictions the loss of the ability to work as a licensed fiduciary.