Many people don’t have a comprehensive understanding of the role and responsibility of a fiduciary. Hopefully, this post will bring clarity to you, the beneficiaries of the fiduciary, while shining a spotlight on those that hold themselves out as a fiduciary but are not.
Representing the insurance component, I work with many different professionals and levels of wealth in the areas of retirement, estate planning, and elder insurance planning. Fiduciary and due diligence responsibility are areas of great concern to me.
This post will, first, define fiduciary and due diligence. Second, it will explain what someone should expect from a person that claims to be a fiduciary.
What Is a Fiduciary?
The definition of a fiduciary is State specific and has a wide range of uses. The title fiduciary and its reference can oftentimes be misunderstood as a level of authority and influence. Since many people are unclear as to the fiduciary’s duties and responsibilities, the lines of authority can be inadvertently and easily misrepresented. The word fiduciary is oftentimes used as a broad brushstroke without clarity and definition.
Cornell’s Law School’s website defines a fiduciary as “the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty is typically referred to as the principal or the beneficiary.”
McCombs School of Business, University of Texas at Austin, defines the duties of a fiduciary as “the legal responsibility to act solely in the best interest of another party. ‘Fiduciary’ means trust, and a person with a fiduciary duty has a legal obligation to maintain that trust. . . . Some examples of fiduciary duties include duties of undivided loyalty, due diligence and reasonable care, full disclosure of any conflicts of interest, and confidentiality.”
Relative to this post, fiduciaries include attorneys, CPAs, financial advisors, and anyone paid to perform the duties of representing the party for a fee. Trust, loyalty, ethics, transparency, integrity, duties, best interest, due diligence, and legal obligation are among the more popular terms when defining a fiduciary.
What Is Due Diligence?
The word due within the term due diligence is defined as a person’s right, what is owed to someone. Diligence means careful, attentive and persistent work or effort.
With that said, here are some of the legal definitions of due diligence from several dictionaries:
Merriam-Webster Dictionary defines due diligence as “the care that a reasonable person exercises to avoid harm to other persons or their property.”
Cambridge Dictionary defines due diligence as “action that is considered reasonable for people to be expected to take in order to keep themselves or others and their property safe.”
Dictionary.com defines due diligence as “reasonable care and caution exercised by a person who is buying, selling, giving professional advice, etc., especially by law to protect against incurring liability. The process of gathering and disclosing relevant and reliable information about a prospective sale, purchase, contract, etc.”
All the above definitions include “reasonable,” but what does that mean for your fiduciary to do to protect you and your property? Some fiduciaries feel that “reasonable” is a simple discussion of a subject and no further investigation is needed. Others feel “reasonable” means to investigate a subject matter to enable an informed discussion and a sound decision.
After reviewing the definitions, experiencing the different ways the term due diligence is used, and putting it in the perspective of the world of finance and estate planning, I conclude that reasonableness in due diligence is the act of examining and investigating the needs of the client and available options to protect the interest of the client first and anyone else’s interest last. Evidence from the investigation will help determine a well-thought-out decision that will minimize client risk and liability.
A fiduciary practicing due diligence must thoroughly examine and present issues and opportunities to protect the interest and/or property of the fiduciary beneficiary, you, the client. This definition leads to a distinction between what I call a true fiduciary and a partial fiduciary (which is defined later in this article). Thus, I have done due diligence to educate the readers of this article with a reasonable amount of information so they can make their own decision.
A true fiduciary is what everyone should have: one who is comprehensive and places the best interest of the client above everything, researches options, and can substantiate recommendations with evidence, not hearsay or general consensus. The investigated information (due diligence) is specific to each situation, and its recommendations cover all angles. While reviewing information, a true fiduciary explores all facets of every topic and does not ignore topics that would be counter to his or her best interest.
Does this always happen? No. I see too often fiduciaries that research a minimal amount of information.