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What is fiduciary duty and how is it broken?

Fiduciary duty is an important concept in business, particularly when you are working with vendors, partners or professional service providers. Fiduciary duty is both a financial and legal concept. Specifically, it means that one person or entity in the relationship has an obligation to act in the interest of the other person or party. If those obligations are ignored, then the other party might have the basis for civil business litigation.

For example, if you are a small business owner and you hire a CPA, then the CPA has a fiduciary duty to you. He or she must make decisions regarding the work performed for your company that are in the interest of your business. Fiduciary duty in the business world is quite complex, because it often involves profit or payment for services even while the fiduciary is supposed to protect client interests. Fiduciaries must walk a very careful line between profit and conflict of interest.

Fiduciary duties are not necessarily broken because profit is made, but they can be broken if unseemly profit is made. Take the CPA example above. At the beginning of the relationship, the small business owner likely signs a contract with the CPA; in that contract, the small business owner agrees to pay the CPA for his or her work. Perhaps there is an hourly fee involved for certain work; the CPA would not break fiduciary duty by charging that fee for work performed. If the CPA charged for double the hours it actually took to perform the work, then he or she is no longer acting in the interest of the client.

Fiduciaries can act outside of the interest of a client in many ways. They can make poor investment decisions, mismanage money or simply act in ways that damage the client's reputation. If you believe someone or some company is in a fiduciary relationship with you and they have breached their duties, consider working with a business lawyer to take action.

Source: Investopedia, "What are some examples of fiduciary duty?," Melissa Horton, accessed Aug. 19, 2016

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