We've all heard tales of lawsuits that sound silly or far-fetched but are very much real. Whether it's a patron suing a restaurant for serving them hot coffee that was, well, hot, an intruder suing a homeowner for an injury sustained during a burglary, or even someone suing themselves, just about anyone can get their day in court.
In such a litigious society, anyone in a position of authority is right to be worried that they'll be sued, even for something that seems trifling. In this article, we'll go over the risks you face if you hold a fiduciary position and how you can protect yourself from them.
Who Is a Fiduciary?
A fiduciary is a person in a place of responsibility over another person. This can be over the general that person's well-being but it often relates specifically to finances. Fiduciaries include, to name a few:
- Bankers or accountants
- Board members and corporate officers
- Money managers and savings consultants
- Pension and benefit coordinators
In other words, pretty much anyone who has some level of control over another person and must act on their behalf is considered a fiduciary.
Fiduciary Liability: The Risks You Face
A fiduciary’s responsibilities have both ethical and legal ramifications.
In the case where the fiduciary is a Pension and Benefits Coordinator, the Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for the protection of individuals who have a pension and benefits. These rights allow employees to sue:
- To recover benefits due under the terms of the plan
- To enforce the rights under the terms of the plan
- To clarify rights under the terms of the plan
(For related reading, see Employee Benefits: What's in It for the Employer?)
Bankers, accountants, and other financial managers also face litigation:
- When the actions of fiduciary are not in the best interest of their clients
- When the fiduciary fails to reveal essential risks involved in an investment
- If the fiduciary misuses funds or their authority tied to a client’s finances
Fiduciaries are expected to act:
- With integrity – using their best judgment in line with their client's desires for their portfolio
- With honesty – giving clients full disclosure, revealing the facts of risk, and never misleading them
- With loyalty – giving equal care to their clients, not neglecting one for another with a larger portfolio
- With utmost care – responsibly using the authority given to them
- In good faith – acting with the client's assets in mind rather than the fiduciary's own benefit
Fiduciaries expose themselves to potential lawsuits when they deliberately violate these standards. For instance, if an insurance agent assures a client that their request for additional coverage will be accepted by the insurance company but the fails to notify the client that the insurer has denied their request, the ramifications when the client files a claim and discovers they are not covered will fall on the agent.
Fiduciary risks, however, don't always involve deliberate intent. Fiduciaries can be held liable for simple mistakes, like checking the wrong box on an application or misunderstanding some aspect of an investment vehicle or insurance policy they sell to clients.
The Protection You Need
As a fiduciary, your best defense is simply to do everything above board. But not engaging in shady practices is not always enough, so here are a few more things you need.
Knowing as much as you can about the products you manage on behalf of clients, as well as the laws and standards that govern those products, is your best bet for avoiding mistakes.
All companies offer training to those in fiduciary positions, often on a mandatory basis. If you work independently or as a contractor, however, it is important for you to stay abreast of new and changing rules and regulations. What is legal one day might no longer be accepted practice the next – and you could find yourself in hot water for not knowing about it.
Policies and Procedures
Establishing a routine and having a set plan is another good way to avoid putting yourself in a position where you'll need an attorney.
These checks and balances should ensure extra diligence and go beyond the minimum required by the laws or standards governing your practice. If possible, the procedures should involve running things by a co-worker or colleague. That extra set of eyes might be what keeps an unfortunate error from escaping your notice.
Professional Liability Insurance
No matter how careful you are, it's impossible to guarantee you won't find yourself involved in a lawsuit. That's what makes insurance coverage so critical.
Policies like errors and omissions insurance protect companies, their workers, and individual agents in the event of a lawsuit brought by a client who feels the agent's work was unsatisfactory. Whether you're accused of acting negligently, with insufficient client consultation, or willful profiteering, this insurance could cushion you from a ruinous settlement.
Keep Your Guard Up
Even if you're as straight as an arrow and as conscientious as they get, you can't afford to let your guard down. The risk of a lawsuit is inherent in any fiduciary role and there's no guaranteed way to avoid it.
Lawsuits don't have to be terribly well-founded to be taken seriously. If a client's investment doesn't go the way they plan and they decide to take you to court over it, you may have to lawyer up and go through the entire process.
Stay up to date on regulations and know your rights, but be sure that you have sufficient insurance coverage in place. You'll be glad it's there when you have to fall back on it.