Q: Can you explain what fiduciary duties are?

Yes, yes I can.

A fiduciary is, at its most basic a person who acts on behalf of another and when doing so has a legal duty to act in that person's best interest and not in their own. 

The most common way you see fiduciary duties play out in your everyday life,  is under the law governing the directors of companies.  In Australia all company directors are fiduciaries of the company.  That means that the directors may be running or overseeing the company but they need to make sure that any actions they take are for the benefit of the company, not for their own self interest.

For example: Let's say I am a director of a company and I have to employ a company to clean the offices.  Let's say  that my brother has a cleaning business.  My brother charges a lot of money for cleaning (a lot more than he's worth) and every time I find him a new client he gives me $2,000. It would be in my interest to just get my brother to do the cleaning, because I would benefit from that. I get a kickback of $2,000 and my brother gets paid above and beyond what he's worth. 

As a company director I am a fiduciary. I am acting on behalf of the company and I need to always do what is best for the company (remember, under the law companies are considered to be people). As a fiduciary I need to make sure that the company is not wasting money, and if there is another company who can do a better job, for a cheaper price than my brother, then I need to make sure that I go with the other company; even if I stand to lose $2,000.  It's not my interests I need to look out for, it's the company's.

Ideally, I would remove myself from making the decision about the cleaners and leave it to the other directors after I told them how I would benefit from my brother doing it, but you get the idea.

Another example of a fiduciary is the trustee of a trust. A trust is property (a house, money, shares) that has been set aside for the benefit of someone else.  A trustee is the person who manages the trust property and ensures that whomever it is meant to benefit is reaping those benefits.  I know this sounds confusing, let me give you an example to demonstrate.

Let's say I inherit a million dollars, and for whatever reason I want to save it for the children that I don't yet have so they can have an easier life. I can put the million dollars aside by creating a trust, which is a legal arrangement that would see me give someone I trust, like my friend Paige for example, my million dollars to invest and keep safely on the condition that she looks after the money and that my children get the money when they are 18 years old. I could hold on to it, but I don't trust myself with money and Paige is really good at looking after it. The million dollars is not really mine anymore, it's now set aside for my children to enjoy when they are 18, Paige doesn't own the money either, she is just looking after it.  

Paige is my fiduciary, because I trust her and because I've given her the power over the million bucks under the trust arrangement, she can do things with that money as if she owned it outright.  She can invest it, buy property with it, or she can just keep it in an account where it will earn interest and let it sit there. If I hadn't given her that power under the trust then she would need to come and bother me every time she wanted to make an investment decision and ain't nobody got time for that.

She doesn't own the million bucks, this is the important thing, as a fiduciary she needs to act in the best interest of the reason for the trust. That means that any investment, or anything she chooses to do with that money has to be for the benefit of why the trust which is to benefit my future children.

Paige can't run off and buy herself a million dollars worth of Oxford shirts and funky socks because that is in her interests, not the trust's interests. 

A fiduciary relationship is basically one where your interests need to take a backseat to those of another's.  A fiduciary needs to act with the trust and confidence of the person they are acting for, because they have that person's property or interests at stake.

Problems arise though, a trustee can go rogue, Paige could decide that she really wants a room full of puppies in Bermuda and run away with my million dollars. I could allow my brother to clean my company without me telling anyone of my kickback. This is called a conflict of interest, which is exactly what it sounds like. When your personal interests conflict with those of the person you have a fiduciary relationship with.

Under the law, when your interests and theirs conflict and if you owe that person a fiduciary responsibility, your interests must take a back seat.  There is a whole body of law dealing with conflict of interests and defences to breaches of duties, if you want to know more by all means ask me about that too.

For more reading

  • http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/
  • http://www.unistudyguides.com/wiki/Fiduciary_Obligations
  • http://www.hallandwilcox.com.au/international/Documents/HAL059_Directors%20Obligations_4pp.pdf
  • http://www.comlaw.gov.au/Series/C2004A00818