Terms Beginning With 'f'

Fiduciary

Image Source:  © Savkoand277 | Megapixl.com

What is meant by Fiduciary?

Fiduciary is a legal term that refers to an organisation or an individual that has been given the responsibility of acting on behalf of another person or entity. Some examples of fiduciaries include bankers, attorneys, and officers.

Fiduciaries are given the task of acting in the interest of the concerned individual. Any action taken by the fiduciary must be with complete integrity and honesty. If the fiduciary does not abide by this, then they are legally liable. Fiduciaries may also be financial advisors to their clients who invest on their behalf.

What sets a fiduciary apart from other advisors?

A fiduciary is better than an advisor as it promises to act in the client's best interest, including the financial interests. Any strategy recommended by the fiduciary must be the one they would go for themselves, had they been in the shoes of their client.

Any provisions provided to the fiduciary can be taken away if misused, and the fiduciary would be charged with legal action. A fiduciary is associated with lesser conflict of interest than other financial advisors and is expected to maintain a high transparency level.

How does an agreement with a fiduciary work?

Any agreement with a fiduciary involves the trustee and the beneficiary. The legal power that a fiduciary is entitled to includes access to the client’s money, property, or wellbeing of the beneficiary. A fiduciary’s actions should not break the trust of the client.

A fiduciary must not make decisions that are beneficial to himself and detrimental to the client. A fiduciary can not carry out additional expenses on behalf of the client. This includes hiring incompetent people who are not fit to carry out the expected task.

The deal is made official through a fiduciary agreement describing the relationship and responsibilities of the parties.  

What types of fiduciary are there?

Fiduciary can be broadly divided into governmental and non-governmental forms. Other types of fiduciaries include:

  • Lawyer: Lawyers have a fiduciary duty toward their clients. Lawyers should disclose any conflicts of interest and should focus on the best interest of their client. Fiduciary duties should be abided not just by individuals practicing law but even by large firms.
  • Guardian: A guardian who has been legally obligated to look after a minor has to act as a fiduciary. Here, the client refers to the parent who has given caretaking rights to the guardian.
  • Decision making board: Consider a company where the board of directors is responsible for managing all stakeholders' interests. As their decision immensely affects the company's shareholders and shareholders, the board must act as a fiduciary. Shareholders can be adversely affected if the board takes a wrong decision that benefits them at the shareholders' cost.
  • Financial Advisor: Financial advisor handles an individual’s assets, funds, and all liquid holdings. This control over funds can easily be misused to act in favor of the advisor and not the client. Advisors may also sometimes have the rights to handle these funds without seeking the approval of the client. Thus, the role of the financial advisor is that of a fiduciary.
  • Real Estate Agents: Real estate agents can be considered fiduciaries as they manage their clients' funds. Real estate agents can either be from the buyer side or seller side. The fiduciary arrangement can be arranged till the interests of both parties are fulfilled.

 

What duties must a fiduciary fulfil?

Fiduciaries must fulfil two main duties: the duty of care and the duty of loyalty. However, there may be times when more is expected out of fiduciaries, depending on the type of client. These two duties are the minimum expected responsibilities out of financial fiduciaries. These duties can be better explained as follows:

  • Duty of care: The duty of care refers to the fiduciary's obligation to make informed decisions that work best for the client. The fiduciaries must decide what the client wants depending on their field of work and must have sound knowledge about the field before they can take any judgments for the client.
  • Duty of Loyalty: This duty mandates fiduciaries to reciprocate the trust placed by their clients in them by avoiding decisions that may be selfishly motivated. The fiduciaries themselves should not hold any conflict of interest that remains undisclosed to their clients. They must also reveal any opportunities where there is a potential for them to obtain commissions.

An additional duty that fiduciaries must take care of is the duty to act in good faith. The client places his faith in the fiduciary, which must be honored back. Out of all available options, only that option should be chosen, which best fits the client’s criteria.

What is the suitability rule?

Fiduciary obligations may not be acceptable everywhere. For example, investment brokers can not fall under the category of a fiduciary. However, there is something called a suitability obligation that they must adhere to.

Suitability obligation only requires the accountable party to go after that option, which is the best fit for the client. While choosing the best option, they may not put their client’s interest above their own.

Under the suitability rule, should deliver the recommendations given after considering the client's financial outlook, future goals, purpose, and risk-taking capacity. The client must not incur additional costs, and there should not be any excessive trades on his behalf. This can lead to a situation where the professionals put their own interests above that of the client.

What happens if the responsibilities are not fulfilled?

Image source: © Mustangmarshal | Megapixl.com

Since the fiduciary is mandated by the law to follow the required duties, it becomes illegal if they are not fulfilled. Legal proceedings might take place in such a case. The court may decide to sue the fiduciary upon breach of contract.

In return, the client may receive compensation for the breach.

What is Wall Street? Wall Street, the Mecca of Financial Transactions in the US, is located in Lower Manhattan City of New York State. ‘Wall Street’ has become another name for financial elitism in the US. Wall Street houses the two largest stock exchanges in the world by market capitalisation, New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ). Wall Street is also home to various other stock exchanges, brokerage markets and banking headquarters. Notable among them are the New York Mercantile Exchange, the New York Board of Trade, New York Futures Exchange (NYFE), Goldman Sachs, etc. Brief History of Wall Street: The term ‘Wall Street’ is said to have originated from the Dutch word ‘de waalstraat’ much earlier in the 17th Century, when New York was a part of New Amsterdam and an actual wall existed at the location during 1685-1699. During that time, this area was used as a slave trading market as well as a securities exchange site. However, after the independence of the US, and in the early 19th Century, it became a site for both residential as well as business hubs. However, slowly and steadily, the business outpaced the residential part and Wall Street became the hub of all financial transactions in the US. It was only during the 20th Century that many skyscrapers came into existence on this street, the tallest of them being 40 Wall Street, which is also known as the Trump Building. Wall Street is now one of the most famous tourist attractions in the US and the Wall Street Bull attracts many tourists every day for a photo opportunity. The iconic bronze sculpture represents the aggressive financial optimistic environment and a symbol of prosperity. Image Source: Shutterstock How does Wall Street work?  Wall Street houses businesses that collectively control trillions of dollars and move the markets every single day. As stated earlier, Wall Street has become a symbol of all financial transactions in the US. Wall Street functions to provide a platform for institutions to raise legitimate capital funding. The process is conducted in a centralised trading arena where those wanting to generate funds are provided with a medium of connection. The trading on Wall Street can happen in various forms - be it by issuing bonds or selling the ownership in the businesses through stocks. The government also regularises the capitalism process happening on Wall Street daily. These regulators provide the money to the productive users in a very smooth manner. Secondly, the financial hub also provides a secondary market to businesses to find investors, in order to raise capital. This bridge helps the markets move towards success. Moreover, Wall Street also houses firms which assist the investors so that they can manage their primary profession or activity. The outsourcing procedure is conducted via the professionals referred to as brokers or dealers and are registered investment advisors. They are bound by a fiduciary duty and act towards their clients’ best interest. These advisors are also asset management companies. Usually, the high earning individuals who are willing to invest and grow their wealth, take the assistance of these asset management companies and focus on generating more money for them. Wall Street can also be considered as a repository for investments across various securities. Wall Street is most commonly known for facilitating buying and selling shares. Individual investors trade the shares of outstanding stocks via their retirement and brokerage accounts. These investors are interested in the daily fluctuations of some of the major indices. Dow Jones Industrial Average and S&P 500 stock market indices have big players and investors trading every day.  Image Source: Shutterstock What is the role of market makers on Wall Street?  The trading revolves around the market makers at Wall Street and they usually facilitate the action in the market and earn a fee for providing their services. A lot many factors decide the movement of prices of traded securities. A mix of factors like sector news, management changes, company performances etc. decide if the prices are going up or down. However, market makers are also one of the biggest factors which have an impact on the share prices. There are individual professionals on the exchange floors facilitating these factors. The electronic communication networks are also part of market makers. Each transaction conducted on the securities exchange requires a party to take the opposite side. 

A Registered Investment Advisor is either an individual or a company which handles the portfolio of high net worth individuals (or HNIs) and advises them concerning buy, sell, or hold off an investment-grade asset. The Registered Investment Advisors have a fiduciary duty towards their client, which makes them obliged to paramount client’s interest and avoid conflicts of interest.

Load More
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK