Fiduciary Liability Insurance

Fiduciary bonds are a type of insurance that protects a beneficiary when a fiduciary fails to act in their best interests. For example, let's say a fiduciary is guilty of stealing money from a beneficiary.

The fiduciary bond will protect the beneficiary and either partially or fully "make them whole" so they don't lose all the money that was stolen.

Fiduciary bonds can be required by law, especially in cases where a beneficiary feels as if the trustworthiness of the fiduciary leaves something to be desired and thus asks for a fiduciary bond as insurance.

While the two terms are sometimes used interchangeably, fiduciary bonds and ERISA bonds are not the same. ERISA (Employee Retirement Income Security Act) bonds are required by law for any individual who manages the funds of an employee benefits plan. The fiduciary must be covered for at least 10% of the money they manage.

Fiduciary responsibility insurance (or bonds) covers the plan in the event of a breach of responsibility by the fiduciary. While fiduciary insurance is not a legal requirement, many fiduciaries choose to purchase the coverage as they can be held personally responsible for losses incurred by a plan during a breach. Additionally, the scope of coverage can be different between an ERISA bond and a fiduciary bond.

A fiduciary is any individual who has a legal responsibility to act solely in the best interests of another person. The fiduciary must make sure to not violate the beneficiary's trust or act in a manner that does not keep the beneficiary's best interests at heart.

An example of fiduciary responsibility is the relationship that exists between an attorney and a client. The attorney accepts the role as a fiduciary and agrees to act only in the client's best interests.

Put one way, all executors are fiduciaries, but not all fiduciaries are executors. An executor is a specific kind of fiduciary who manages the affairs of an individual after their death in accordance with their will.

An executor does not have to be an individual; trust companies and banks can also serve as executors.

Many incorrectly assume that all financial advisors are required to be fiduciaries. This is not true. While many financial advisors serve in a fiduciary role, some do not. It is up to those seeking out financial advisors for their services to determine whether or not they require someone who will act as a fiduciary.

The more involved a financial advisor is in the money management process, the more important it is for them to take on a fiduciary role.

"Fiduciary" is a broad word used to describe a legal relationship between a responsible party and a beneficiary where the responsible party must act in the best interests of the beneficiary. Some financial advisors act as fiduciaries, but others do not.

There are many examples of fiduciaries and fiduciary-beneficiary relationships. A lawyer has a fiduciary responsibility to a client. A doctor has a fiduciary responsibility to a patient. A CEO has a fiduciary responsibility to a company's shareholders. Even spouses have fiduciary responsibilities to each other.

There are lots of relationships that fall under the "fiduciary" category, but it is important to not assume. The best way to know if an individual or entity will serve in a fiduciary role in their relationship with you is to ask.