Understand Your Fiduciary Duties — And How to Protect Yourself

FEBRUARY 4, 2025

People volunteer or accept fiduciary roles without being aware of the personal liability exposure the role creates. A fiduciary is a person or entity legally bound to act in the best interest of a client and place the client’s interest above their own.¹  The relationship is defined by the fiduciary’s expertise and management of the client’s assets.

This article explores the fiduciary’s duty of care, types of fiduciaries, and how a breach of duty may occur. If you are a fiduciary or have one, it’s crucial to understand the relationship to ensure you can protect yourself effectively.

What Are the Main Duties of a Fiduciary?

Given that a fiduciary possesses knowledge and control over their client’s assets and is legally obligated to prioritize the client’s interests, what exactly does a fiduciary do? A fiduciary advises and acts on behalf of their client. They are legally and ethically responsible for representing the client’s needs, usually regarding financial or legal issues. 

Fiduciary duties include:

	Duty of loyalty.The fiduciary will always act in the best interests of the client.		Duty of confidentiality. The fiduciary has a legal obligation to keep certain information private and confidential.
	Duty of care.The fiduciary will make sound, sensible decisions regarding the client.		Duty of prudence. The fiduciary is required to make decisions with care, skill and caution to protect the interests of the client.
	Duty of good faith.The fiduciary is required to have subjectively honest and honorable intentions in all professional dealings.		Duty of disclosure. The fiduciary must disclose any conflict of interest they may have when acting on behalf of a client.

Both the fiduciary and the client should be aware of the rights granted by the relationship and the responsibilities that fall outside a fiduciary’s duty. If there is a breach of fiduciary duty, the fiduciary could be required to pay damages to the client.²

Examples of Fiduciary Relationships

The most common fiduciary relationships involve legal or financial professionals who agree to act on behalf of their clients. However, there are other fiduciary relationships. For example:

• Guardians are legally accountable for a minor child’s well-being, making decisions regarding the child’s education, healthcare, and other essential needs.
• Nonprofit board members are tasked with ensuring the organization is managed in a responsible and ethical manner.
• Trustees are responsible for managing the assets of a trust and acting in the best interest of the beneficiaries. 
• Executors are responsible for carrying out the wishes of a deceased person as outlined in a will. 
• Employees may have a duty of loyalty to their employer and be legally liable if they misuse their employer’s resources. 
• Conservator of an incapacitated person is responsible for the well-being and/or managing the incapacitated party’s finances.

What Constitutes a Breach of Fiduciary Duty?

Breach of fiduciary duty can take many forms. Some common examples of breach of fiduciary duty are:

Misappropriation of assets. The fiduciary takes the client’s assets for their own benefit.²

Conflict of interest. When the best interests of the beneficiaries conflict with the personal interests of the fiduciary, a conflict of interest may arise.³

Self-dealing. If a fiduciary exploits their position for personal gain, this is self-dealing.⁴

Negligent management of assets. The fiduciary fails to manage assets with the level of skill and care of a reasonable person in a similar situation.⁵

Inadequate recordkeeping or failure to account. A fiduciary is obligated to keep adequate records and communicate important information about an estate or trust to beneficiaries. The law or terms of a trust document may require the fiduciary to provide regular accountings to the court and/or beneficiaries.⁶

Failure to distribute assets. If a fiduciary is required to distribute assets to a beneficiary, such as during the settlement of a deceased person’s estate, and fails to do so or unreasonably delays the distribution, it may be considered a breach of fiduciary duty.⁷

Preventing Breaches of Fiduciary Duty

Even an accidental breach of fiduciary duty can lead to serious consequences, including termination of duties and personal liability. Many fiduciaries are new to the role and may not fully grasp what is expected of them. If you are serving as a trustee, personal representative, attorney-in-fact, guardian, or conservator, one of the best ways to avoid breaching your duties is to have an experienced, collaborative team of professionals, including:

• Insurance professionals
• Legal counsel
• Accountants
• Financial planners

Remember, maintaining vigilance and diligence is essential to preserving the trust and integrity central to fiduciary duty. A team of professionals will be able to guide you along the way.

Fiduciary Liability Coverage

Fiduciary liability coverage is designed to cover financial losses arising from a fiduciary’s failure to meet their legal and ethical responsibilities. This insurance applies to fiduciaries such as trustees, executors and guardians, to name a few. It covers losses resulting from breaches of fiduciary duty, failure to disclose conflicts of interest, and errors in managing a trust or estate.⁸