Fiduciary Agreement

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Fiduciary Agreement

A Brief Introduction About the Fiduciary Agreement

The contract derives its name from the fiduciary definition, which involves  trust, and is most commonly seen between a trustee and a beneficiary. In such contracts, ownership of an asset is transferred from one person to another person known as a fiduciary. The fiduciary will have ownership rights to act on behalf of the transferor, and when the contract ends, the asset is re-transferred by the fiduciary.

The person entrusted with the fiduciary responsibility has to act on behalf and in the best interests of the transferor. It represents the highest standard of trust. The transferor could be the principal or the beneficiary. There should, however, be no conflict of interest between the fiduciary and the beneficiary.

In this agreement, there are two parties involved — the person who is entrusting the responsibility is known as the principal, and the person who is being delegated the responsibility, known as the fiduciary. The fiduciary has to make decisions on behalf of the principal and protect the assets that are entrusted to him for the advantage of the beneficiary to whom the assets are eventually transferred.

There is a specified tenure for the fiduciary duty.

Who Takes the Fiduciary Agreement? – People Involved

Two parties, the principal and the fiduciary draft the agreement. The fiduciary is expected to act in the best interests of the principal or beneficiary, and manage the assets on their behalf for the duration of the agreement.

Purpose of the Fiduciary Agreement – Why Do You Need It?

When the ownership of an asset needs to be transferred, this responsibility needs to be delegated to someone who can be trusted. As the value of the assets involved is extremely high, handing over the responsibility to an inexperienced professional would mean that the assets would be misused, and the beneficiaries would suffer a heavy loss.

The meaning of fiduciary is trust, and therefore the responsibility of the transfer of assets to the beneficiary is given to a fiduciary.

When a professional is engaged through this agreement for managing investments, the investment manager acts in a fiduciary capacity to protect the beneficiary from losses.

Is fidelity a fiduciary? No. While fidelity refers to being loyal and faithful to someone, a fiduciary has a professional responsibility to the client. A fiduciary account is a deposit account that an entity opens on behalf of principals.

Contents of the Fiduciary Agreement – Inclusions

This agreement should be comprehensive and include all the required information so that the interests of all the parties to the agreement should be protected.

The information that you need to include in this agreement is as follows:

  • Parties to the agreement
  • The effective date of the agreement
  • The value of the assets involved and the details of the assets
  • Purpose of the agreement
  • An acknowledgment that the beneficiary who would be entitled to the assets at the end of the agreement
  • Rights and responsibilities of both parties
  • The laws of the state applicable where this agreement is drafted
  • Representation and Warranties
  • Limitation of Liability
  • Acknowledgment of uncertainty and risk involved in the transaction
  • Indemnification clause for damages caused to the beneficiary due to the incapability of the fiduciary or to the fiduciary due to the actions of the beneficiary
  • Details of payment, commission, or any other remuneration to the fiduciary
  • Responsibility of payment of taxes and costs as mandated by the law
  • Responsibility of expenses of maintenance of the assets
  • Lien and charge over the assets and the criteria for such lien
  • Ownership of the asset during the course of such trust
  • Payment of advance or security deposit
  • Insurance and the responsibility of payments in that regard
  • Confidentiality clause
  • Termination of the agreement
  • Other boilerplate conditions

How to Draft the Fiduciary Agreement?

When the agreement is being prepared, care has to be taken to ensure that the laws relating to fiduciary obligation are kept in mind. A fiduciary agreement form may be consulted while preparing the agreement and modified according to the needs of the parties.

Here is the process for drafting the agreement:

  • Eligibility of the principal and the fiduciary to enter into a contract
  • The consideration paid to the fiduciary
  • The terms of the contract should be fair to both the principal and the fiduciary. There should be no fraudulent motive of either party
  • The fiduciary should not disclose any information accessed to a third party
  • Whether the dispute will be resolved by arbitration or litigation
  • Termination clause
  • The valuation of risk in the process and the acknowledgment of the uncertainty
  • Responsibility of payment of all costs in the contract
  • Limitation of liability during the transaction due to the risk and uncertainty

Negotiation Strategy

In case of a fiduciary agreement, the principal will make an offer to the fiduciary regarding the fees for managing the assets on behalf of and in the best interest of the beneficiary. The fiduciary can negotiate the fee based on their experience and value of assets. Negotiation strategies could also be about the payment of costs, risks, liabilities-bearing, and reporting for taxation

Benefits & Drawbacks of the Fiduciary Agreement

The benefits of a fiduciary agreement are mentioned below:

  • The interest of both parties to the agreement is protected. The principal knows that the assets will be managed professionally and the fiduciary knows that the agreed fees will be paid
  • If the fiduciary commits an act of fraud, then the agreement will be terminated
  • The assets of the beneficiary are protected through professional care

Here are the drawbacks of a fiduciary agreement:

  • Misuse of assets: The fiduciary can misuse their position of trust and engage in fraudulent activity with the assets of the beneficiary
  • Non-payment of fees: The principal may not pay the fiduciary for their services
  • No legal recourse: Neither party would have any legal recourse

What Happens In Case of Violation?

In case of violation, the following remedies are available to both parties under the fiduciary agreement:

  • Money Damages: The fiduciary has to compensate the principal for the loss in the value of the assets 
  • Restitution: The affected party would have to be restored to the position before the contract
  • Rescission: The contract would stand canceled
  • Reformation: The court would revise the contract to ensure parity
  • Specific performance: The party at fault would have to fulfill their obligation

A fiduciary agreement ensures that the principal can delegate complete responsibility of managing their assets to a fiduciary, who will act in the best interest of the ultimate beneficiary. The fiduciary needs to have professional experience and is paid a fee.