What is a fiduciary?

A fiduciary is a person or organization that manages someone else’s money and other assets. Fiduciaries are required by law to always act in that person’s best interests. 

So what exactly are the responsibilities of a fiduciary? And what’s the difference between a fiduciary and other kinds of financial advisers and managers? Plus, who can become a fiduciary? Learn the ins and outs of how fiduciaries work.

Key takeaways

• Fiduciaries are people or organizations that manage other people’s assets, like money or property.
• The law says that fiduciaries must prioritize their clients’ financial well-being and best interests.
• Some fiduciaries might be trained financial professionals, while others might be family members or friends of the people whose assets they’re managing.

Fiduciaries have legal obligations to the people whose finances and assets they manage. Fiduciaries are required to:

• Solely act in their clients’ best interests: Fiduciaries have a legal duty to make financial decisions that are in their clients’ best interests. That means the fiduciary shouldn’t make decisions to benefit themself or anyone other than their client. 
• Keep their own assets completely separate: Clients’ assets need to be kept separate from the fiduciary’s own assets. If they’re not kept apart, the fiduciary risks compromising their legal duty to act only in their clients’ best interests. 
• Manage their clients’ assets with care: Fiduciaries need to make sure their clients’ assets are managed properly and carefully. Fiduciaries may be responsible for things like paying bills and taxes, managing bank accounts, investing their clients’ money, and collecting debts. And it’s important they do those things on time and with care. 
• Keep detailed records of their work: Fiduciaries have to keep accurate, up-to-date records of the assets they’re managing. In fact, they’re legally required to do so. And if fiduciaries don’t keep adequate records, it could get them into legal trouble. 

What is the fiduciary rule?

The fiduciary rule is the regulation that legally requires fiduciaries to always act in only their clients’ best interests.

Other rules governing fiduciary duty

There are also other rules that govern fiduciary duty. These rules can vary by industry. 

There are laws that specifically outline what investment companies are responsible for as fiduciaries, for example. Then there are other laws that are tailored to fiduciaries who are individual financial advisers. 

Plus, there are legal standards related to fiduciary duty that most voluntary retirement plans have to meet to protect their clients’ money. And over the years the government has expanded what kinds of financial professionals have to comply with fiduciary rules.

But no matter what industry fiduciaries belong to, they all have to act in their clients’ best interests and follow all relevant fiduciary rules. 

What happens if there’s a breach of fiduciary duty?

For people who breach their fiduciary duty, there can be serious consequences. 

Fiduciaries who don’t prioritize their clients’ best interests or don’t meet other legal requirements may have to personally compensate their clients for any financial losses. And a professional fiduciary may lose their job. Plus, there can be legal repercussions. 

Fiduciary relationships can be established in different ways:

• Power of attorney: A legal designation that gives someone else the legal authority to act on another person’s behalf. And that can include acting as a fiduciary and making their financial decisions. 
• Professionals who have fiduciary responsibility: Real estate agents, financial advisers, broker-dealers, attorneys and trust officers often have fiduciary duties to their clients. That means they may be required by law to act in their clients’ best interests. But they typically don’t have the same control over a person’s assets as someone with power of attorney. 

There are plenty of non-fiduciary financial advisers. But many financial advisers—like those who are registered with the U.S. Securities and Exchange Commission—do have legal fiduciary duty to their clients. 

There are other financial advisers who might not be held to fiduciary standards. But they may have to follow less strict regulations that govern their responsibilities to their clients, often called the suitability standard.

And remember, fiduciaries don’t have to be professional financial advisers at all. Sometimes, they’re a trusted family member or friend who isn’t a financial professional. 

Financial advisers and other professionals who aren’t bound by fiduciary duty are often held to less strict requirements—often called the suitability standard.

If an adviser adheres to the suitability standard but not fiduciary duty, their client may receive more general advice. And while the advice may suit them well, it’s not required to be optimized for their exact circumstances.

If you work with someone who has to adhere to fiduciary duty, they’re required to act in your best interests. A fiduciary financial adviser may be more likely to do thorough, personalized research. And they might take into account their client’s risk tolerance, current portfolio balance and financial goals when making decisions or giving advice.

Fiduciaries can be financial professionals, trusted family members or friends. But one thing all fiduciaries share is a legal requirement to act in the best interests of the people they represent. And if you have additional questions about fiduciaries, you can seek guidance from a legal professional.

Looking for more resources as you navigate your personal finance journey? Learn about other financial concepts like creating a budget and building credit.