Fiduciary 

The term “fiduciary” frequently arises in finance and investments, especially when discussing responsibilities and ethical obligations. Understanding what a fiduciary is and the duties involved is essential for anyone engaging in financial activities. This guide provides a clear and detailed overview of fiduciary concepts, particularly in investment management. 

What is a Fiduciary? 

A fiduciary is an individual or organisation entrusted to act on behalf of another person or group, prioritising their best interests above all else. This relationship is grounded in trust and confidence, obligating the fiduciary to act with loyalty and care towards the beneficiary. Common examples of fiduciaries include financial advisors, trustees, corporate directors, and legal guardians. 

The essence of a fiduciary relationship is the ethical and legal duty to act solely in the beneficiary’s best interest, avoid conflicts of interest, and ensure that decisions are made with the utmost good faith. 

Understanding Fiduciary 

To grasp the concept of a fiduciary fully, it’s crucial to understand the foundational principles that govern fiduciary relationships: 

• Duty of Loyalty: This principle mandates that fiduciaries act without personal conflict, ensuring that their interests do not interfere with their obligations to the beneficiaries. For instance, a fiduciary should not engage in transactions that benefit themselves at the beneficiary’s expense. 

• Duty of Care: Fiduciaries must make informed and prudent decisions, reflecting the care that a reasonably careful person would exercise in similar circumstances. This includes conducting thorough research and analysis before making decisions on behalf of the beneficiary. 

• Duty of Good Faith: Acting with honesty and integrity is paramount. Fiduciaries must ensure that their actions are transparent and in the genuine interest of the beneficiaries. 

• Duty of Confidentiality: Protecting the privacy of the beneficiary’s information is a critical responsibility. Fiduciaries must not disclose sensitive information without proper authorisation. 

These duties collectively ensure that fiduciaries uphold the trust placed in them, acting ethically and in alignment with the beneficiary’s best interests. 

Types of Fiduciaries 

Fiduciary roles vary across different sectors, each with specific responsibilities tailored to their functions. Some common types include: 

• Trustees: Individuals or institutions responsible for managing assets placed in a trust for beneficiaries. Trustees must adhere to the terms in the trust agreement and act in the beneficiaries’ best interests. 

• Executors: Appointed to administer a deceased person’s estate, executors ensure that assets are distributed according to the will and that all legal and financial obligations are met. 

• Financial Advisors: Professionals who provide financial planning and investment advice. When acting as fiduciaries, they must prioritise their clients’ interests above their own. 

• Corporate Directors: Members of a company’s board who are responsible for overseeing the management and ensuring that the company’s actions align with shareholders’ best interests. 

• Investment Managers: Professionals entrusted with managing investment portfolios on behalf of clients, making decisions that align with the clients’ financial goals and risk tolerance. 

Each of these roles carries specific fiduciary duties, tailored to their responsibilities and the nature of their relationship with the beneficiary. 

Fiduciary Duty in Investment Management 

In investment management, fiduciary duty is paramount, ensuring that those managing others’ money act in the best interests of their clients. Key aspects include: 

• Prudent Investor Rule: This rule requires fiduciaries to invest and manage assets as a prudent investor would, considering the portfolio’s purposes, terms, and distribution requirements. It emphasises the importance of diversification to minimise risk and align with the beneficiary’s financial goals. For example, a trustee managing a trust fund should avoid concentrating investments in a single asset class, instead spreading them across various sectors to mitigate risk. 

• Duty to Monitor: Fiduciaries must continually oversee investments, ensuring they remain appropriate for the beneficiary’s objectives and risk tolerance. Regular reviews and adjustments are necessary to respond to changing market conditions and the beneficiary’s evolving needs. 

• Avoidance of Conflicts of Interest: Fiduciaries must avoid situations where their interests could conflict with those of the beneficiary. Full disclosure is required if potential conflicts arise, ensuring transparency and maintaining trust. 

For instance, a fiduciary investment advisor should not recommend investment products that yield higher commissions for themselves if those products are not in the client’s best interest. Instead, they should suggest options that align with the client’s financial goals and risk appetite. 

Examples of Fiduciary 

Understanding fiduciary roles in real-world scenarios can provide clarity on how these duties manifest: 

LPL Financial’s Cash Sweep Practices (2024) 

The Securities and Exchange Commission (SEC) investigated LPL Financial’s cash sweep practices, scrutinising how clients’ uninvested cash was transferred into low-interest-paying bank accounts. Retail investors filed lawsuits against LPL, alleging breaches of fiduciary duty due to minimal interest rates paid on these sweep accounts. Several other banks and brokerages faced similar SEC inquiries and legal challenges. LPL disclosed the SEC’s request for additional information in August 2024 and stated its cooperation.  

American Airlines and BlackRock (2024) 

A U.S. federal court ruled against American Airlines for failing its workers by choosing BlackRock to manage part of its pension scheme. The court claimed that BlackRock, the world’s largest asset manager, is influenced by “ESG activism,” and American Airlines breached its fiduciary duties by focusing on non-economic environmental, social, and governance (ESG) interests. This ruling highlights the increasing legal risks U.S. companies face over ESG policies and diversity and inclusion initiatives.  

JPMorgan Chase Fined by Monetary Authority of Singapore (2024) 

The Monetary Authority of Singapore (MAS) fined JPMorgan Chase S$2.4 million for failing to prevent and detect misconduct by its relationship managers. These managers inaccurately reported information in 24 over-the-counter bond transactions, charging clients spreads above agreed rates. JPMorgan admitted liability, paid the civil penalty, and refunded the overcharged fees to affected clients. The bank has since enhanced its internal controls and pricing frameworks.  

These cases underscore the critical importance of fiduciary duties in both the United States and Singapore, highlighting the legal consequences of failing to uphold these obligations. 

Frequently Asked Questions