Fiduciary duties, also known as a prudent person standard of care, require financial professionals to prioritize their clients’ interests. They cannot recommend strategies that benefit themselves or offer kickbacks or bribes to their client.
Broker-dealers and other investment professionals don’t always abide by a fiduciary duty. Instead, they adhere to a suitability standard that requires them to consider their clients’ financial situation, goals and risk tolerance before providing recommendations.
Defining the Role of a Fiduciary Agent
Fiduciary agents are anyone who has been given the authority to manage another person’s assets. This includes money managers, accountants, bankers, executors, and trustees.
A fiduciary duty requires that an agent put their client’s interests ahead of their own, and act with honesty and loyalty. A fiduciary’s responsibilities are ethical and legal, based on the “prudent person standard of care.”
An advisor adhering to their fiduciary duty must consider your goals, risk tolerance and other investments when selecting financial products or investing vehicles for you. They must also be aware of the potential impact of environmental, social and governance factors on investment returns.
Historically, the laws that govern how fiduciary agents can handle your assets were strict. These laws were enacted to protect clients against the financial interests of brokers and advisors.
The Basics
When you want property, money or other valuables to pass to someone after you die, you place it into a trust. The person in charge of the trust, called a trustee, is responsible for managing that trust and its assets to benefit the person who will inherit it.
Fiduciary relationships apply to a wide variety of situations, and some of the most common are those with attorneys, real estate agents and financial advisers. A fiduciary must always act in the best interest of the client or party they are representing.
A fiduciary must also use reasonable care and skill in handling their clients’ business. This means they should keep their client’s information confidential and never make unauthorized trades on their behalf. It also means they should avoid recommending products that aren’t in the best interest of their clients.
The Role of a Trustee
Trusts are a legal form in which the grantor (the person or entity who establishes a trust) gives title to assets for the benefit of a third party. The trustee holds and administers these assets on behalf of the beneficiaries, acting in accordance with the grantor’s wishes.
Trustees have a fiduciary responsibility to make decisions in the best interests of their beneficiaries. This means they must put their personal biases, beliefs and interests aside when making a decision on their clients’ behalf.
Some of the decisions trustees face can be complex, especially in a multi-generational trust with many different beneficiary classes. In these cases, trustees often need to seek impartial expertise and manage conflict.
Trustees must also understand filing requirements and exemptions in their state. In addition, they have broad powers to control distributions, including in amount and timing. Moreover, they must consider how to invest trust funds. They may need to adjust distributions as beneficiaries’ circumstances change, such as through illness or loss of employment.
The Role of a Broker
In today’s financial landscape, brokers play an important role in facilitating investors’ requests to buy and sell shares or other financial instruments. They also provide services to carry out these requests and maintain the investor’s accounts.
They are responsible for evaluating capital market conditions and in-depth calculations, thereby offering recommendations to their clients on how to conduct investment transactions.
Brokers typically work on commission. They are paid based on the amount of property sold or leased, usually in the range of 4% to 6%.
Full-service brokers typically offer a comprehensive range of financial services, including investment advice, retirement planning, and market research. They also earn commissions on the sale of financial products, such as stocks and bonds.
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