The Spectrum Of Fiduciary Risks

The knee-jerk panic about assuming fiduciary responsibility is largely derived from sweeping generalizations that are untrue in most cases and exaggerated in many others. The dread of fiduciary liability is based on what can happen in the worst case. If this logic was applied to air travel, there would be no airline business. If applied to driving, there would be no automobile industry.

There are dangers in these and while fear exists, it does not rise to the level of neverfly or neverdrive. Why then is there a dominant neverfiduciary community?

The reality of fiduciary risk is that the potential danger varies widely and can be mitigated by reasonable practices.

Definition

A greater understanding of the fiduciary risk is fundamental to deciding whether to take on a fiduciary role or to avoid that responsibility. The essential fiduciary requirement is the responsibility to act in a client’s best interest without regard for personal gain. The responsibility is limited to a prudent course of action based only on facts that were known at the time of the action. These fiduciary requirements mean that a fiduciary is protected in three ways:

  • Fiduciaries bear no responsibility for outcomes that are caused by events or circumstances after the fiduciary action.
  • Arrangements must be in the fiduciary’s best interest before assuming the responsibility.
  • Fiduciaries must be able to show that the course of action taken was prudent.

While these three protections do not eliminate all potential liability, when used consistently exposure is reduced to a level that is often less risky than not being a fiduciary.

The Fiduciary Choice

Assuming fiduciary responsibility is always the choice of the individual or institution that will have the fiduciary role and is not required by regulation or by clients. This choice is not a simple one since it involves adopting the three protections described above and others that regulations may impose.

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