Fiduciary duty requires trustees to prioritize the interests of the principal, and breaches can occur through conflicts of interest or subordinating the principal’s interests. The concept varies by country, with US stockbrokers exempt. Breaches resulting in profit for the trustee can be remedied through constructive trust.
Fiduciary duty requires that the best interests of the principal be placed above that of the trustee. Fiduciary duty exists in many formal or professional relationships that involve trust in the handling of assets or money, such as banker-client or attorney-client, where the party providing the services is considered the trustee and the client is considered the principal. In some cases the fiduciary duty is established by law, in others it is explicit in the deeds establishing the relationship. A breach of fiduciary duty occurs whenever the interests of the principal are not given top priority, whether or not the principal has suffered financial losses.
Breach of fiduciary duty can occur in a number of ways, all of which relate to the requirements of a fiduciary. For example, a trustee cannot profit from the relationship or the fact that the relationship exists without the express knowledge and consent of the principal. For example, if a real estate agent is an IRA-approved custodian for a client who wishes to purchase property for the IRA, the real estate agent cannot participate in the sale or otherwise profit from it; she can only take custody of the real estate for the benefit of the IRA owner. This does not prevent the trustee from charging for services rendered.
Trustees frequently face potential conflicts of interest. These can occur when a fiduciary has clients whose interests conflict with each other. When such causes arise, the trustee must make a choice between or between clients, but may not attempt to provide services to clients with conflicting needs, so that the performance of duty to one harms the interest of another, violating thus the fiduciary duty. Attempting to maintain the fiduciary relationship with clients whose conflicts conflict is a breach of fiduciary duty.
Placing anyone’s interests above those of a principal is also a breach of fiduciary duty. A financial advisor with a fiduciary duty to clients, for example, might invest a client’s funds in a stock because it will generate a commission for a friend. Whether the investment turns out to be beneficial to the principal is irrelevant; the fact is that the fiduciary duty has been violated because the principal’s interest has been subordinated to other interests.
An interesting fact that investors should be aware of is that in the United States, fiduciary duty does not usually apply to the relationship between stockbroker and client. US stockbrokers are required to advise their clients that their interests may not always be consistent. There are countless instances in American law that support the statute exempting stockbrokers from this liability.
When there is a breach of fiduciary duty that results in profit for the trustee, it is considered inconceivable to let the profit remain with the trustee, even if no specific law has been violated, and the common remedy is called constructive trust. In this example, the constructive trust would consist in safeguarding the profits until they can be transferred to the principal.
Fiduciary relationships can be more complex. For example, business partners have a fiduciary duty to each other. If either partner earns money outside the partnership by virtue of being a member of the partnership, this is considered a breach of fiduciary duty, but the remedy in this case would be to use constructive trust to share the profits equally to the within the partnership. Senior executives and corporate officers can also be considered to have a fiduciary responsibility to each other and to the company.
The laws and legal standards governing fiduciary duty and breach of fiduciary duty vary from country to country. The concept of fiduciary duty is one of the most important in British common law and is also given high priority in Australia. The US gives trustees more leeway in interpreting their duty and of course exempts stockbrokers from duty. The Canadian standard falls somewhere between those set by the United States and Australia. Despite the differences, however, the concept of fiduciary duty is an essential standard of law around the world, and the differences extend more to the strength of penalties imposed for violations.
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