Fiduciaries can be paid through flat fees, hourly rates, or a percentage of managed assets, depending on their role and service structure. All fee arrangements must be disclosed up-front.
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What is a fiduciary? Definition and responsibilities
If you are the client of a fiduciary, they are legally and ethically required to put your best interests above even their own. It is a responsibility, bound by various laws, that insures those making financial decisions do so with care and loyalty.
Key takeaways:
- Fiduciaries must act in their client’s best interest and avoid conflicts.
- Various professions and relationships may be governed by different fiduciary laws.
- Choosing the right fiduciary will depend on your specific needs..
Definition of fiduciary duty and why it’s important
When someone handles aspects of your finances, you want to have absolute trust in them and know that they are protecting you. In this day and age, that is no easy ask. That’s where fiduciaries come in:
A fiduciary is a person or organization that makes financial decisions on behalf of someone else, and they are legally and ethically obligated to act in their client’s best interests.
You can trust a fiduciary because laws require them to be trustworthy. Fiduciary duty can apply to many different situations (see below), but one of the most common is financial professionals and advisors. The rest of this article will cover why fiduciary duty should be an important aspect of your financial planning. Of course, New York Life does not provide personalized tax or legal advice. Please contact your tax or legal advisor to find out how fiduciaries operate on a personalized basis.
What are the core fiduciary responsibilities?
Fiduciary duties can vary based on the relationship to the client, but they almost always involve finances. Depending on their profession and role, different laws may govern their duties. General fiduciary duties involve:
- Care: Reasonable care and due diligence must be completed before financial decisions are made.
- Loyalty: The fiduciary must act solely in the interest of the principal, and conflicts of interest must be avoided.
- Good faith: Decisions must be made with honesty, sincerity, and in accordance with applicable law.
- Confidentiality: In some professions, a fiduciary has an obligation to keep a client’s information confidential.
- Disclosure: All relevant information that goes into a decision must be presented to the principal.
- Prudence: The “prudent person standard” requires that decisions be made as a reasonable and knowledgeable person would make them.
The benefits of having a fiduciary
The primary benefit of having a fiduciary is that you can trust them to always act in your best interests. You shouldn’t have to worry about conflicts of interest, aggressive sales tactics, or shady tactics. A good example to think about is of a financial planner. A fiduciary must, by law, give you investment guidance that best benefits you. One that is not a fiduciary might only present you options that give them the highest commissions, regardless of whether it’s good for you or not.
How much does a fiduciary cost?
Fiduciary fees vary by service type, complexity, and the professional’s qualifications. Financial advisors may charge a flat fee, hourly rate, or a percentage of assets managed, usually 0.5% to 1.5% annually. Legal or estate fiduciaries might bill hourly or receive a set percentage, based on regulations. Always ask the fee structure beforehand to make informed financial decisions and avoid surprises.
Types of fiduciary services
Fiduciaries serve a wide array of roles across different professional and personal relationships, each governed by different regulations and ethical standards. Here are a few of the most common types:
Fiduciary financial advisors
Financial advisors might be one of the most important types of fiduciaries. They are responsible for guiding clients through complex financial scenarios that can affect the rest of their lives, including investing, retirement planning, and estate management. They are obligated to recommend strategies and products that align with the client’s financial goals and level of risk tolerance, rather than ones that may generate higher commissions. Not every financial professional acts as a fiduciary, however, so it's important to ask and find someone you trust to help you make these important decisions.
Related: What is a Certified Financial Planner?
Managing trusts
When someone sets up a trust, they appoint an entity to control the assets within that trust. The person who is put in charge is called the “trustee.” No matter what type of trust it is, the trustee has a fiduciary responsibility to the beneficiaries (those who benefit from the trust).
Corporate board members
The board members of large, publicly traded companies have a slightly different fiduciary duty. It’s not to an individual client, but to all of the company’s shareholders. They are required to thoroughly consider all decisions, remain transparent, and uphold ethical standards. Neglecting these duties can lead to legal consequences, and more.
Legal guardianship of a minor
When an individual is appointed as the legal guardian of a minor, they assume a fiduciary responsibility that is both significant and strictly regulated. The guardian is required to act in the minor’s best interests at all times, managing the child’s personal care, assets, and legal affairs with integrity.
Attorneys and clients
Attorneys owe their clients a fiduciary duty that includes providing competent advice, acting with honesty and care, and keeping client information confidential. They also must disclose any potential conflicts of interest and step aside if those conflicts can’t be resolved.
Who can be a professional fiduciary?
Professionals who commonly serve the role of fiduciary include financial advisors, trust officers, accountants, attorneys, and corporate trustees. Each must meet relevant state licensing requirements and adhere to industry regulations. The path to becoming a professional fiduciary typically involves specialized education, relevant work experience, and earning certifications or undergoing background checks to ensure reliability and trustworthiness.
Choosing the right fiduciary
When choosing a professional fiduciary, you should consider their credentials and reputation for ethical conduct. Here are some common steps that are recommended you take when looking for a fiduciary:
- Verify that the individual or organization holds the appropriate licenses and certifications required for their specific role.
- Check with any state governing agencies for their profession that track complaints.
- Review their professional history and seek references from past clients.
- Make sure fee structures are transparent, and their duties are clearly explained.
These steps can help you gauge their reliability and give you extra peace of mind. New York Life advisory services can help pair you with a reliable financial professional.
Fiduciary FAQs
Fiduciary fees vary by service type and complexity. Financial advisors usually charge 0.25%–2% of assets managed per year, hourly rates from $100–$500, or flat fees for defined services.
In most cases, yes. When it comes to managing your finances, and thus your future livelihood, you want someone you can trust, and fiduciaries are legally obligated to act in your interests.
Fiduciaries are legally obligated to act in their client’s best interest. Some financial advisors are fiduciaries, but not all of them are.
There are qualifications for many fiduciaries, but they vary by specific role.
A trustee is a specific type of fiduciary that is legally obligated to act in the beneficiary’s best interests. There are also other types of fiduciaries.
A breach of fiduciary duty occurs whenever the fiduciary acts in a way that is not in accordance with the law. Some common examples are misappropriation of funds, failure to disclose important details, self-dealing, and negligence.
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