What Is a Fiduciary and How Are They Different From a Financial Advisor?

A fiduciary is trusted to act on behalf of another person or entity, usually when making decisions regarding finances and investments. Serving as a fiduciary means taking on a significant level of responsibility and putting the interests of your clients or investors first. Additionally, fiduciaries must act with integrity and transparency, keeping detailed records and disclosing any potential conflicts of interest.

Overall, becoming a fiduciary requires excellent skills in financial management, as well as sound judgment and ethical decision-making abilities.

Fiduciary Duty

Financial experts and advisors who owe a fiduciary duty to their clients are held to a higher standard of care than other professionals, such as brokers or insurance agents. This means they must put their client's interests ahead of their own and avoid conflicts of interest. In addition, fiduciaries must disclose all material information that could reasonably affect their clients' decision-making.

Some examples of fiduciary duty include:

• Always acting with honesty and integrity.
• Avoiding conflicts of interest that could benefit the fiduciary at the expense of their clients.
• Disclosing all relevant information to clients.
• Using income and assets in ways that benefit the client's interests instead of their own.

Those who breach their fiduciary duties can be held liable for damages.

The fiduciary duty is a cornerstone of the relationship between a financial advisor and their client. It helps to ensure that the client receives unbiased advice and prudent investment management services.

Fiduciary Responsibilities

Fiduciary duties range from handling personal finances to overseeing retirement accounts. Below are some of the most common fiduciary responsibilities:

• Investment Fiduciary: Helps clients manage their investment portfolios with responsibilities such as choosing appropriate investments, creating an asset allocation strategy, and monitoring portfolio performance.
• Insurance Fiduciary: Serves as a fiduciary to their clients' insurance contracts and maintains the financial soundness of those policies.
• Retirement Fiduciary: Responsible for overseeing and managing retirement accounts on behalf of their clients, such as IRAs or 401(k)s.
• Business Fiduciary: Responsible for overseeing and managing the finances of a business, including all investment decisions and expenses.
• Estate Fiduciary: Responsible for managing the assets and affairs of someone who has passed away, such as an executor or trustee. This entails estate settlement services, probate, and fiduciary accounting services.

Each fiduciary responsibility requires specialized knowledge and expertise in different areas of finance.

Fiduciary Relationships

There are several different types of fiduciary relationships, each with its own responsibilities.

Trustee and Beneficiary

The trust agreement governs the fiduciary relationship between a trustee and beneficiary. The trustee is responsible for administering the trust according to the terms of the agreement, while the beneficiary is the person who receives the benefits of the trust.

A trustee can be an individual, a corporation, or even a governmental entity. The trustee must act in the beneficiary's best interests and administer the trust property prudently. This includes all trust and estate services such as paying creditors, distributing assets and property to beneficiaries, accounting for trust income and disbursements, and filing periodic court accountings.

In Idaho, trusts are primarily governed by the state legislature. Under Idado fiduciary laws, trustees must register the trust with an Idaho court and the trustee must contact current beneficiaries within 30 days of accepting responsibility for the trust. In writing, the trustee must provide their name, address, and the court in which the trust is registered. If requested, the trustee will also provide a copy of the terms of the trust that describe the beneficiary’s interest, the assets of the trust, and details about the administration of the trust. Finally, beneficiaries are also entitled to annual statements of the trust accounts.

Board Members and Shareholders

The fiduciary relationship between board members and shareholders is governed by corporate law. Board members are responsible for overseeing the corporation's management and making decisions in the best interests of the shareholders. Shareholders are the corporation's owners and have a vested interest in its success.

This fiduciary relationship is often referred to as the "business judgment rule." Under this rule, board members are protected from liability as long as they act in good faith and make decisions that they reasonably believe to be in the corporation's best interests. However, this protection is not absolute, and board members can still be held liable for breaches of their fiduciary duties.

Majority shareholders also have a fiduciary duty to prioritize the company’s best interests when making decisions and taking action.

Guardians and Wards

The fiduciary relationship between a guardian and their ward is governed by state law. Guardians have legal custody of children, individuals with special needs, or incapacitated adults who cannot care for themselves.

Guardians are responsible for managing the affairs of their wards and making trusted decisions. This includes financial decisions such as controlling the ward's income and assets, purchasing insurance policies, investing their money in appropriate investments, paying bills, filing taxes, and other financial responsibilities.

The Idaho Guardian and Fiduciary Association in Boise, Idaho, serves to make sure that protected individuals are ethically and sensitively cared for in a cost-effective and least-restrictive manner.

Answers to common questions regarding guardians can be found here.

Promoters and Stock Subscribers

Securities regulations govern the relationship between stock promoters and stock subscribers. Promoters are individuals or entities who sell securities to investors, such as stocks or bonds. Stock subscribers are the investors who purchase these securities.

Promoters have a fiduciary duty to disclose all material information about the security to the investor. This includes information about the riskiness of the investment, the expected return, and any other information that could reasonably affect the investor's decision.

Lawyers and Clients

State law regulates the fiduciary relationship between a lawyer and a client. Lawyers owe their clients the duty of loyalty. They also have a duty of confidentiality that requires them to keep their clients' information private, except under specific circumstances such as court orders.

Additionally, lawyers have a duty of care that requires them to provide competent representation to their clients. This includes being familiar with the law and legal procedures relevant to their client's case, researching any necessary legal issues, and keeping up-to-date with any changes in the law.

In 2019 and 2020, two cases resulted in the Idaho Supreme Court ruling that a lawyer must return attorney fees to a client after breaches of fiduciary duty “even if there are no resulting damages.”

Investment Corporations and Investors

The Investment Company Act of 1940 regulates the fiduciary relationship between investment corporations and investors.

Investment companies have a fiduciary duty to their investors to manage the fund's assets tactfully and make decisions in the investors' best interests. Therefore, they must also disclose all material information about their securities, including their investment objectives and policies, any risks involved, their fee structure, and current holdings.

Insurance Companies and Policyholders

Insurance companies also owe their policyholders a fiduciary duty. To fulfill this duty, insurance companies must disclose all material information about their products and policies to their customers, including any relevant facts about the risks involved in purchasing a policy and any potential benefits. They are also required to manage their customers' funds appropriately, invest them in safe securities, and pay all legitimate insurance claims as quickly as possible.

There are many different types of fiduciary relationships in society today. Each one is governed by state law to ensure appropriate conduct throughout the fiduciary relationship.

How Is a Fiduciary Different From a Financial Advisor?

A fiduciary is an individual or entity that has been given the legal responsibility to manage the affairs of another person and act in their best interests. A financial advisor is a professional who provides advice and guidance to clients on how to grow and protect their wealth.

While both fiduciaries and financial advisors owe a duty of care to their clients, there are important differences between them:

• First, fiduciaries must always act in the best interests of their clients or wards, while financial advisors do not have this obligation. Financial advisors are only required to provide "suitable" advice, which means that their recommendations must be appropriate for the client's investment objectives and risk tolerance.
• Second, fiduciaries must exercise the utmost good faith and loyalty in all their dealings with their clients. On the other hand, financial advisors only need to exercise reasonable care.
• Third, fiduciaries also have a duty of loyalty to their clients and are legally bound to keep all client information confidential except under certain circumstances. In contrast, financial advisors may disclose client information to third parties, such as their firm's managers or other financial advisors within the company.
• Finally, fiduciaries must always put their client’s interests before their own. Financial advisors are free to pursue their own best interests in addition to those of their clients, such as recommending products that are in their client's best interests and that will also help the advisor meet their targets.

While fiduciaries and financial advisors play an essential role in helping people grow and protect their wealth, it’s important to understand the difference before making any decisions about your financial future. Likewise, it's important to understand other types of non-financial advisor fiduciaries, such as:

• Attorneys
• Medical professionals
• Child guardians

Common reasons why someone might need fiduciary services include:

• They cannot manage their affairs due to physical or mental limitations.
• They have suffered a traumatic event that has left them incapacitated.
• They are not knowledgeable about a particular subject and need someone to guide them.
• They wish to delegate the responsibility of managing their affairs to someone else.
• They require family office services to help manage their wealth, assets, and estate.

Ultimately, working with a fiduciary can help you achieve all your financial, legal, medical, and personal goals. Whether you need assistance managing your affairs or simply require advice from a trusted professional, there is a fiduciary out there who can help.?

Contact us to learn more!

If you’re looking for a fiduciary in Idaho, we can help. Idaho Trust offers exceptional, relationship-based service to help you build wealth with purpose. Learn more about our approach to investments and the Trust and Estate Services we offer. Contact us with questions!