Fiduciaries are individuals or entities with a legal obligation to act in the best interest of those whom they represent. This obligation is known as a fiduciary duty. Fiduciaries can include trustees, executors, attorneys, financial advisors, and corporate directors, among others. One of the most crucial aspects of fulfilling this duty is avoiding conflicts of interest.
A conflict of interest occurs when a fiduciary’s personal interests or objectives conflict with their obligation to act in the best interest of their clients or beneficiaries. This conflict can arise in many different ways, some of which are more common than others. In this answer, we will explore some of the most common conflicts of interest that fiduciaries should avoid.
Self-Dealing:
Self-dealing is a conflict of interest that arises when a fiduciary uses their position to benefit themselves at the expense of their clients or beneficiaries. For example, a trustee might sell a piece of property owned by the trust to themselves at a below-market price or use trust funds to invest in a company they own. This behavior is a violation of the fiduciary’s duty of loyalty to their clients or beneficiaries.
Insider Trading:
Insider trading is a conflict of interest that arises when a fiduciary uses confidential or non-public information to make investment decisions that benefit themselves or their associates. For example, a corporate director might buy or sell stock in the company they serve based on information that has not yet been made public. This behavior is illegal and violates the fiduciary’s duty to act in the best interest of their clients or beneficiaries.
Dual Agency:
Dual agency is a conflict of interest that arises when a fiduciary represents two parties with conflicting interests in the same transaction. For example, a real estate agent might represent both the buyer and the seller in a property sale. In this situation, the agent’s duty to act in the best interest of both parties is compromised, and they may be more likely to prioritize their own interests over their clients’ interests.
Undisclosed Relationships:
Undisclosed relationships can create conflicts of interest when a fiduciary fails to disclose a personal or professional relationship that could influence their decision-making. For example, a financial advisor might recommend a particular investment to a client because they have a personal relationship with the investment manager. Failure to disclose this relationship is a violation of the fiduciary’s duty to act in the best interest of their client.
Outside Business Interests:
Outside business interests can create conflicts of interest when a fiduciary has business interests that conflict with their duty to act in the best interest of their clients or beneficiaries. For example, a financial advisor might recommend a particular investment to a client because they have a financial interest in that investment. This behavior is a violation of the fiduciary’s duty of loyalty to their clients or beneficiaries.
Personal Relationships:
Personal relationships can create conflicts of interest when a fiduciary’s personal interests or relationships conflict with their duty to act in the best interest of their clients or beneficiaries. For example, a trustee might favor one beneficiary over another because of a personal relationship with that beneficiary. This behavior is a violation of the fiduciary’s duty to act impartially and without bias.
Referral Fees:
Referral fees can create conflicts of interest when a fiduciary receives a fee or commission for referring a client to another professional. For example, a financial advisor might recommend a particular attorney to a client because the advisor receives a referral fee from the attorney. This behavior is a violation of the fiduciary’s duty to act in the best interest of their clients and recommend professionals based on their qualifications, rather than their financial incentives.
Fiduciaries have a legal obligation to avoid conflicts of interest and act in the best interest of their clients or beneficiaries. Failure to do so can result in legal and financial consequences, including lawsuits, fines, and damage to the fiduciary’s reputation. Therefore, it is essential for fiduciaries to be aware of and avoid these common conflicts of interest.
