Learn about the rule of thumb that can guide your spending and savings decisions.
What is a fiduciary?
A fiduciary is a person who has an ethical responsibility to another party, known as a beneficiary. In most cases, that means making principled decisions about the beneficiary’s money, but it could also mean taking sound legal action or giving accurate counsel. Who is considered a fiduciary is defined, in the U.S., by various departments of the government, and violating fiduciary duty could have legal consequences.
As defined by the U.S. Securities and Exchange Commission (SEC), fiduciaries are required to exercise the highest standard of care for their beneficiaries. That is a concept called fiduciary duty, and who is obligated to follow fiduciary duty is elucidated in rules issued by the government. Various departments in addition to the SEC, such as the Department of Labor, have the power to issue fiduciary rules.
Fiduciaries often include anyone charged with making important decisions on behalf of another party. These decisions comprise legal and financial decisions and could apply on both the personal, business, and corporate levels. The beneficiary has the right to expect that her fiduciary is not acting in a way that promotes the fiduciary’s interests at the expense of the beneficiary’s.
Fiduciaries are frequently involved in the stewardship of their beneficiaries’ money. Many people at all stages of a financial transaction have a fiduciary duty, from the bank to the trustee of a retirement account to the board of directors of a company. But not every person who gives financial advice is a fiduciary.
The fiduciary duty is a standard that ensures that a fiduciary doesn’t intentionally give bad advice, make a bad investment, or otherwise disadvantage the beneficiary. But the legal principle is so strict that when fiduciary duty is breached, the beneficiary may sue for damages, and some punitive measures could even result in the fiduciary losing his license to practice.
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Mike goes to a fiduciary named Ike to open an individual retirement account with Ike’s investment bank. Mike deposits $5,000 in the account, and Ike picks fund to invest the money in that will maximize Mike’s returns. Ike has a fiduciary duty to invest in stocks with the utmost consideration for Mike’s money.