The Standard of Conduct for Fiduciary Duties

In Chris Vanderwolk's second article, he covers the standard of conduct and the duties applicable.

Published: 03.05.2024

In Chris Vanderwolk's first article in his Fiduciary Duties series, he identified who a fiduciary is, now he will cover the heart of their obligations - the standard of conduct required of them.

Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. [Meinhard v. Salmon, 249 N.Y. 458, 464 (N.Y. 1928) (Cardozo, J.) (Internal citations omitted).]

What is a "standard of conduct?"

Breaking out our Black's Law Dictionary again, a standard of conduct is "that degree of care which a reasonably prudent person should exercise under same or similar circumstances."

That's a lot of legalese. What does it mean? Let's break it down:

"that degree of care" = the way the fiduciary acts
"reasonably prudent person" = a fictional person who acts with an average amount of care.
"under same or similar circumstances" = we generally look to the education and experience of a person, as well as any specific realities when determining what "reasonable" is.

So a standard of conduct is how we'd expect a person who always acts with the average amount of caution to act in a similar situation.

What duties does a fiduciary owe?

Because Fiduciaries are entrusted with the property of another, fiduciaries owe a high standard of care to those they serve. These duties are broken down into two principal duties: the duty of loyalty and the duty of care.

Duty of Loyalty: A fiduciary must act solely in the interest of the beneficiaries or clients, putting aside personal gains or interests. This means avoiding conflicts of interest, disclosing any potential conflicts, and not profiting at the expense of the beneficiaries.
Duty of Care: This duty requires a fiduciary to act with the care, skill, and diligence that a prudent person would exercise in comparable circumstances. It implies making informed decisions, conducting thorough research before making recommendations, and continually monitoring the interests entrusted to them.

In plain language, the Duty of Loyalty means that the fiduciary must put the needs of others ahead of their own, and the Duty of Care means that they have to be smart about their decisions. To paraphrase Thomas Jefferson, "ignorance is no excuse."

Why is this standard so rigorous?

The standard of conduct for fiduciaries is designed to build trust and protect confidence in fiduciary relationships. Fiduciaries have a lot of authority to spend other people's money. Given that power, fiduciaries must act in a way that avoids self-dealing or poor management. The high standard of conduct ensures that beneficiaries (the people for whom the fiduciary acts) can feel secure in the belief that the fiduciary is looking out for them.

How does ERISA change the general standard of conduct for a fiduciary?

ERISA §404(a)(1) elevates and expands the duties of a Fiduciary when acting on behalf of a plan subject to ERISA.

What are the specific duties of an ERISA fiduciary?

A fiduciary of an ERISA has expanded duties over the general model of a fiduciary:

Undivided Loyalty: acting solely in the interests of participants and beneficiaries; adhering to the instruments governing the plan and consistent with ERISA;
Exclusive Benefit: using plan assets for the exclusive purpose of providing plan benefits, or for defraying reasonable expenses of plan administration;
Prudent Expert: act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and
Diversification: to diversify the plan's investments to minimize the risk of large losses;

In sum, an ERISA fiduciary must meet an incredibly high bar - they must act solely in the best interests of plan participants and beneficiaries, must make decisions that a prudent expert would make, must diversify plan assets and use those plan assets only for providing benefits to plan participants and beneficiaries.

In Chris' next post he will explore when one might become a fiduciary and where fiduciary duties apply, deepening our understanding of the scope and significance of these roles.

Christopher Vanderwolk, Esq.
Fiduciary Duties Series: What is the Standard of Conduct a Fiduciary Must Meet?