The Extension of Fiduciary Responsibilities and
A Framework for Decisionmaking
March 31, 2014
Glenn G. Kautt MBA, CFP, EA, AIFA
Professional fiduciaries are well versed in the applicable federal laws which apply to
their responsibilities. For example, for most financial advisors, fiduciary standards are
based primarily on specific federal statutes such as the RIA Act of 1940, ERISA, UPIA,
MPER and PPA, as well as various professional credentialing organizations’ standards,
such as CFP Board and the AICPA.
In the context of the federal statues mentioned previously, individuals are considered
fiduciaries under these various laws while performing duties prescribed by the law. For
example, ERISA section 3(21)(A) provides that a person is a fiduciary “to the extent” the
person is performing a fiduciary function. i
While these statutes and credentialing standards rarely apply to individuals we serve as
clients, many of our clients take on the legal and moral responsibilities of a fiduciary
under state law, either inadvertently or on purpose, to facilitate the management of the
financial and personal affairs of a friend, relative or other third party.
How far do our legal and moral responsibilities as fiduciaries extend to provide advice to
a client on how they should act? And, if it does extend beyond our written contract with
them, how can we best frame our decision on how and under what circumstances to help
them?
This paper considers two issues where an advisor’s fiduciary responsibilities may
inadvertently extend beyond a contract with a client. First, we examine whether an
advisor can give advice about a third party to a client or intercede on behalf of a client
with a non-contracted third party, and would this carry a fiduciary responsibility?
Second, we look at whether an advisor’s non-financial advice and actions may constitute
acting as a fiduciary under case law or state statutes. Finally, the paper develops a
framework for decision making in areas where professional fiduciaries may consider
advising a client’s actions who is acting as a fiduciary, and how that will avoid the
unintended responsibility and liability of the paper’s first and second considerations.
“I didn’t know that!”
Often, an advisor finds out about a client’s potential fiduciary status inadvertently. It
may occur when a client tells their advisor they will become a trustee or agent as the
result of something happening to a friend or relative. Usually, the timing of the client’s
change of status is not known in advance. As a result most advisors haven’t had an in-
depth discussion with clients regarding their responsibilities as an agent, trustee or
executor/administrator.
There are a couple reasons for this. First, it may be inappropriate for the advisor to
advise a client on their legal responsibilities under applicable law. Second, even if the
advice were appropriate, the client is very likely to forget it unless the triggering event
happens soon after the discussion.
Having said that, there are also situations where an advisor knows a client is becoming
involved as an agent or trustee. For example, your client, as an adult child or sibling
might be called in to help manage the affairs of a relative during their gradual mental
impairment. This differs from dealing directly with clients who are becoming impaired.
Regardless of the relationships, impairment is happening with increasing frequency in
our industry due to the nature of our aging client base. Surprisingly, not much research
has been done in this area, which is at the critical juncture of medicine, law and
financial management. However, a senior advisor in our firm authored the professional
paper “Is Your Firm Prepared for Alzheimer’s?” published in the December 2010 edition
of the Journal of Financial Planning. As such, this paper does not address the critically
important fiduciary ramifications of working with impaired clients and their caregivers.
The fiduciary relationship
Our firm developed a client brochure we give to clients entitled Fiduciary Matters. ii It
discusses the role and responsibilities of professional fiduciaries, and states in part:
“You may have heard the term “fiduciary” as it relates to investment
services…. Even though many have heard the term, few can actually define
it…. This creates a difficult situation for you, the investor. What should
you do? How do you know who to trust?... Said differently, is your
financial advisor consistently and properly fulfilling his or her duties to
your benefit? In a true fiduciary relationship you are legally supposed to
be able to vest the utmost faith and confidence in the fiduciary. In fact, the
very nature of such a relationship is conceived as one in which the
beneficiary is relieved of the need to oversee the conduct of the fiduciary.
Do you benefit from such a relationship with your financial advisor?”
The brochure goes on to define what is a professional fiduciary, discusses investment
service models, how to engage a fiduciary, and reviews proprietary systems we employ
as fiduciaries.
That’s all well and good, but the brochure does not cover issues addressed in this paper.
The first is giving advice as a fiduciary unrelated to our contract, that is, advice
unrelated to investments or financial matters connected with our clients’ financial
affairs. The second is a situation of an advisor acting as a fiduciary to the client when
part of what the client is doing is interacting with a third party who is not contracted
with the advisor. The issue here is how far does your fiduciary relationship go? Can it
extend beyond simply giving investment advice? Can it extend to a third party?
To answer this question, let’s review where a fiduciary obligation might exist between
parties. When operating under the Registered Investment Advisor Act of 1940 our
advisory contract clearly obligates us to act in a fiduciary capacity. However, a number
of circumstances can occur without a contract where fiduciary relationships and
responsibility exist. These may include:
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•
•
•
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Corporate partners, joint venturers, directors and officers / company and stockholders: iii
Board of directors / company iv
Partner / partner v
Teacher / student vi
Priest / parishioner seeking counseling vii
In the state where the author lives, Florida, the law is quite specific. A fiduciary
relationship might exist wherever one man trusts in and relies upon another. viii The
decision from Jacobs v. Vaillancourt, 634 So.2d 667, 670 (Fla. 2d DCA 1994) states in
part: “The relations and duties involved need not be legal, but may be moral, social,
domestic, and merely personal.”
An attorney reading this paper might jump up and say, “These are narrowly construed
cases and may not be broadly applicable to what you’re discussing! Actually, state case
law may be more broadly applicable that most people know, especially in states with
aggressive consumer protection or broadly written laws on fiduciary responsibilities.
When it comes to an advisor being bounded by only federal law, well, it just ain’t so!
Thus, depending on specific laws in the state(s) in which advisors practice, a fiduciary
relationship may exist where there is no contractual obligation. This implies wellmeaning advice you give a client concerning something outside the scope of your
contract may carry a legal fiduciary responsibility at the state level because the client
thinks it does, and where there has been no disclaimer on your part to the contrary.
Having said that, do not confuse the extension of a fiduciary responsibility which
already exists between parties with the well-known concept that fiduciary duty cannot
be imposed unilaterally by one party. For example, statues and case law in Florida
emphatically state an individual or entity cannot unilaterally create a fiduciary
relationship with another and thereby impose a fiduciary duty on that person. Instead,
that person must expressly or implicitly agree to serve the interests of the first
party. ix The author recommends readers carefully consider the state laws where they
practice to clarify what actions and advice outside of their contractual obligations might
be considered a fiduciary relationship.
Concerning our second issue, in Florida an otherwise arm’s length business transaction
may be converted into a fiduciary duty when a party takes on responsibilities beyond
those required by the contract. In this case, a fiduciary relationship may arise from
what would normally be an arm’s length business transaction when one party takes on
responsibilities not required by the transaction, leading the other party to reasonably
believe the first party is acting on behalf of the other party’s interests.
This is a situation much more likely to happen to an advisor. Let’s review an actual
court case to look for parallels. In First National Bank and Trust Company of the
Treasure Coast v. Pack, 789 So. 2d 411 [Fla. 4th DCA 2001], the buyers of a new home
sued a bank that provided them with a construction loan for breach of fiduciary duty
after the builder failed to correct various defects in the home. Normally, a bank’s
responsibility is to provide a loan, which does not extend their responsibility to the
construction.
In this case, however, before their purchase the buyers viewed a model home which
served as the builder’s sales office, and in which the bank’s representative offered
construction loans to prospective buyers. The buyers met with the bank’s representative,
who told them the bank had an excellent relationship with the builder. Shortly
thereafter, the buyers entered into a contract with the builder and a construction loan
agreement with the bank.
In this case, construction did not go smoothly. Numerous delays ensued and when the
buyers had difficulty getting responses from the builder, they contacted the bank from
time to time and asked the bank to intercede with the builder. The bank did intercede,
with varying degrees of success.
The day before the closing, the buyers informed the bank there were numerous defects
in the house and asked the bank to freeze the final draw on the construction loan
because they were continuing to have difficulty with the builder. The buyers also asked
the bank whether they needed an attorney at the closing. The bank assured them it was
unnecessary and told them a bank officer would be present at the closing, and funds
would be withheld from the builder to ensure the defects would be corrected.
When the buyers arrived at the closing, they learned another bank officer had
overridden the earlier promise to withhold the funds and the final draw on the
construction loan was issued jointly to the buyers and the builder. The bank officers
assured the buyers the builder was trustworthy and the bank would obtain an affidavit
from the builder assuring the builder would fix the construction defects.
The bank also told the buyers it could not wait until they hired an attorney and, if they
did not close, the bank was “washing its hands of the matter” and the buyers would have
to go to court. The buyers proceeded with the closing. The bank never obtained an
affidavit from the builder, and the defects were never fixed. The buyers brought suit
against the bank and the builder.
At the heart of the matter, the jury found the bank had voluntarily taken on extra
services for the buyers and knew, or had reason to know the buyers were relying on the
bank to counsel and inform them. Thus, the bank owed a fiduciary duty to the
buyers. The buyers were awarded damages equaling the costs of the repair for the poor
workmanship of the builder. In focusing on the actions of the defendant, the bank
voluntarily involved itself with a third party and, according to the laws of Florida, the
court held them to have taken on an additional fiduciary responsibility.
Could this happen with an advisor trying to help a client with a matter involving a third
party? The short answer is yes. Our clients have come to us for advice and counsel on a
wide spectrum of issues such as the purchase of homes and cars, or which college to
choose for their children. The author has been asked to intervene with insurance
companies, trust departments and brokerage firms to extricate clients from contracts,
collect money and settle billing disputes. They have asked us to discuss disbursements
from estates and trusts with beneficiaries where we are neither the administrator nor
trustee.
In every case, under Florida law, there is a potential fiduciary relationship and
responsibility involving the third party. Readers are cautioned to carefully examine their
actions in states in which they practice with regard to giving advice to a client about a
third party under their state laws.
A framework for decisions
Given the substantial likelihood of a client asking for advice or services outside the
bounds of their contract, the advisor is faced with a number of responses to the client.
One might be: “No, I can’t help you, because it may carry a legal responsibility I’m
unwilling to undertake or cannot afford.” While this may seem prudent, because of
various levels of fiduciary and other relationships with different clients using a blanket
“No” response may sometimes be appropriate. Worse still, it might lead to the client
disengaging with the advisor. Another response might be: “No, I can’t help you, but I’ll
find someone who can.” Depending on the issue at hand and the availability of people
who truly can assist and advise the client, this answer might be appropriate, or not.
The third response might be: “Yes, I can help you with that.” Because many advisors
use this response from time to time, we propose a framework for decision making where
an advisor, in his or her role as a professional fiduciary, is advising a client while that
client is acting as a fiduciary in a particular state.
1. Review documents with the client regarding the client’s required role.
2. Discuss with the client and determine the role the client will/should accept:
a. Successor Trustee
b. Qualified Plan Trustee
c. Power of Attorney
d. Executor/administrator
3. Determine if there are roles the client should not accept for reason of inability to
understand or comply, lack of proper qualification, or lack of time to fulfill the
role properly.
4. Review applicable state law for responsibilities in specific fiduciary capacities:
a. Trustee
i. Individual trust
ii. Qualified Plan
b. Executor/Administrator
c. Power of Attorney
i. Durable Power of Attorney
ii. Healthcare Power of Attorney
iii. Special Power of Attorney
5. Discuss state law client on how laws may add to responsibility and fiduciary
burden.
6. Provide compliance approved education materials on specific role(s), state
and/or federal statutes and procedures as applicable.
7. Refer to appropriate professional(s) as applicable.
Look before you lead
The paper examined whether an advisor’s advice and actions constitute acting as a
fiduciary under case law or state statutes. In Florida and many other states, statutes and
case law state that certain actions by an advisor outside of a contractual relationship,
and having nothing to do with money, can bring on a fiduciary relationship with
attendant responsibilities and liability.
This paper also considered if an advisor’s interaction on behalf of a client with a third
party not covered by a contract may carry fiduciary responsibilities. There is convincing
evidence under some state laws and under a wide range of circumstances advisors’
fiduciary responsibilities do extend to interacting with a third party.
This paper also proposed a brief framework for an advisor to use in working with clients
who are assuming fiduciary responsibilities for the benefit of another party. Using this
framework to examine a potential or existing fiduciary role can help advisors and client
better understand various state statutes which will apply to the client, and may better
prepare clients for their fiduciary responsibilities.
i
Pegram v. Herdrich, 120 S. Ct. 2143 [2000] In every case charging a breach of an ERISA fiduciary duty,
the threshold question is whether the person was acting as a fiduciary, that is, was her or she performing a
fiduciary function when taking the action subject to the complaint?
ii Go to http://www.savantcapital.com/insights?topic=Fiduciary and click on the brochure “Fiduciary
Matters.”
iii In Plus Group Ltd. & Ors v Pyke [2002] EWCA Civ 370 [21 March 2002]; Guth v. Loft Inc., 5 A. 2d 503
[Del. Ch. 1939]
iv Re Saul D Harrison & Sons plc, [1995] 1 BCLC 14, [1994] BCC 475; Woolworths Ltd v Kelly, [1991] 22
NSWLR 189
v Kak Loui Chan v John Zacharia, [1984] 58 ALJR 353; Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd,
[1988] 2 Qd R 1; Meinhard v. Salmon, 164 N.E. 545 [N.Y. 1928]
vi Glover v Porter-Gaud [2000] 98-CP-10-613
vii Doe v Evans, 814 So.2d 370 [Fla. 2002]
viii Bingham v. Bingham, 11 So.3d 374, 387 [Fla. 3d DCA 2009]
ix Taylor Woodrow Homes Fla., Inc. v. 4/46-A Corp., 850 So. 2d 536 [Fla. 5th DCA 2003]