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 means involving 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 other party 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 for the best interest of the other party. It represents the highest standard of trust. The other party could be the principal or beneficiary. There should be no conflict of interest between the fiduciary and the beneficiary.

In case of such agreements, 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 is known as the fiduciary. The fiduciary has to take decisions on behalf of the principal and protect the assets that they are entrusted with to 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

There are two parties to the agreement, the principal and the fiduciary. The fiduciary is expected to act in the best interest 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 as in the case of 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 which 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 principal and the fiduciary
  • The effective date of the agreement
  • The value of the assets involved and details of the same
  • Purpose of the agreement: 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

How to Draft the Fiduciary Agreement – Points to Consider While Preparing the 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 fee paid to the fiduciary for managing the assets on behalf of the beneficiary
  • Contract Terms: The terms of the contract should be fair to both the principal and the fiduciary. There should be no fraudulent motive of either party
  • Non-disclosure clause: The fiduciary should not disclose any information accessed to a third party
  • Dispute resolution: Whether dispute will be resolved by arbitration or litigation
  • Termination clause: The notice period for premature termination of the contract

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.

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
  • Termination of agreement: If the fiduciary commits an act of fraud, then the agreement will be terminated
  • Protection of assets: 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 cancelled
  • 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.