The concept of a “fiduciary duty” has been incorporated by various legal systems to enforce a duty of loyalty on an individual who has been endowed with the mandate of achieving the best interests of another party (Sitkoff, 2013). The concept will generally arise when the entrusted party has been put in vulnerability circumstances by the other party. This relationship’s nature or the broad scope of authority awarded to the entrusted party causes the vulnerability. The fiduciary duties mainly encompass the duty of loyalty, care, and following the instructions of the client (CFP Board, 2020).
There are types of relationships that will always have a fiduciary duty, such as the directors who have a fiduciary duty towards their company shareholders due to the scope of authority they have over the company (Sitkoff, 2013). The financial advisor who is an investment advisor to a client acts as an agent as per the common law of agency. The advisor is considered a fiduciary, thus also subject to liability for breaching the fiduciary duties he owes the client. The principal is entitled to receive proper remedies, including compensatory damages to make up for the losses suffered and the forgone gains to the fiduciary duty’s breach. This paper intends to discuss the similarities and differences between a financial adviser and director regarding their relationship with their principal, which is the client or company, respectively. The research will also discuss the duties they owe their principals and how they are similar or different.
The Fiduciary Relationship and Obligations of the Financial Advisor and Directors With their Principals
Equity has stipulated two provisions for the fiduciary relationships, which are the no-conflicts and the no-profits rules. The Federal Court indicated that these rules stipulate that the fiduciary should be disinterested and have undivided loyalty to the principal. The fiduciary should concentrate on the conflicts between their duties and undeclared personal interests and their duties and misuse their fiduciary position for personal gain or benefits.
According to Common law and the Corporation Act (2001), company directors owe several duties to their organizations. In the equity field, the relationship between directors and the company is identified as the founding ground of the fiduciary obligation that flows from the director to the company (Mosworthy, 2010). Regardless of the High Court Authority and the essential academic debate on the scope of obligation in equity, case law has precisely suggested that directors do owe their company’s the fiduciary duty of disclosure (Nosworthy, 2016). Moreover, the powers of company management and controlling its respective affairs and assets are the board of directors’ obligation. Hence, the law has imposed the statutory, common law, and equitable obligations in the directors. The director is considered to indisputably be a holder of the fiduciary office, thus attracting the application of fiduciary duty to their conduct with the company being the beneficiary to whom he or she owes the fiduciary obligations (Baker & McKenzie, 2017). The rigorous application of the fiduciary obligations on the company directors is because of the degree of control that comes with their position to demonstrate their day to day accountability (Nosworthy, 2016).
The scope of the fiduciary duty owed by the director entails that the latter needs to have his actions be in good faith and for a proper purpose to benefit the company. The court applies an objective test depending on the comparable person, using similar skills and knowledge as a director would have also acted if put in the same circumstances (“Part 2D.1 – Duties and power: [181.20] Division 1 – General duties” 2014). In the case of Bell Group v, Westpac Banking Corp (2008) would provide a detailed review of the law and indicated that the directors have fiduciary duties conduct themselves in the company’s best interests and exercising granted powers only for the appropriate purposes (Jacobson, 2016). This ruling would be reiterated in the case Re S & D International Pty Ltd (2010) where the court stated that the director has a fundamental duty in the common law, which is to act bona fide in what they consider the company’s interests in entirety (“Part 2D.1 – Duties and power: [181.20] Division 1 – General duties”, 2014).
It is prudent to note that exercising for a proper purpose and the duty to act in good faith are distinct duties. Therefore, as suggested in the case of Howard Smith Ltd v Ampol Petroleum Ltd (1974), a two-step test is to be used to determine whether a director did act appropriately or not; the test starts by determining the powers within which the exercise is being questioned then the court looks into the particular exercise being challenges to determine the considerable purpose. Finally, the court concludes to see whether a purpose is proper or not (“Part 2D.1 – Duties and power: [181.20] Division 1 – General duties”, 2014).
While the fiduciary duty and relationship between the directors and company have been determined, the relationship between the financial advisors and the clients under the Australian law is not definite. The firms and officers offering financial services are not categorized on the status-based groups of fiduciary relationships outlined in the Australian law (Hanrahan, 2018). Nonetheless, the nature of interactions between the financial advisers brings forth fiduciary obligations in offering advice (Degeling & Hudson, 2014). Under equity, the financial advisor can only be treated as a fiduciary only when the individual has accepted to perform particular functions and has accepted responsibility towards another party. The other party has been made to believe that he or she is reasonably entitled to have the advisor act in the former’s best interests while excluding any individual or third-party interests. In the case of Commonwealth Bank of Australia v Smith, the point would be said where the fiduciary duty is placed only when the adviser has voluntarily assumed the properly stipulated obligations and the relationship did attract the fiduciary obligations in the absence of any modifications including in the contract (Edelman, 2013).
The financial advisor in Australia has many obligations placed on them concerning regulations being developed over time. However, whether the increased obligations and current steps amount to a genuine fiduciary duty remains unclear. Financial advisors had a statutory duty to provide advice that is fit for purpose to meet the standards expected from a reasonable financial advisor before the reforms in 2013(Cairns, 2020). While the obligation does not meet the fiduciary duty level, the duty was a replacement to a simple consumer standard and caused a change within the professional model. The Commonwealth Corporations Act (2001) underwent amendments in 2013 to introduce the requirement for financial advisors having to act in ways that illustrate the best interests of the clients (Parliament of Australia, 2020). This created a tighter regulation of financial advice, even though it did not speak strictly of financial duty.
The requirement outlined in Section 961B of the Act demonstrated a move to the fiduciary duty standards. In this way, the Australian Securities and Investment Commission (ASIC) was empowered and has even implemented civil actions for any regulation breaches. In the case of ASIC v NSG Services Pty Ltd (2017), the Federal Court imposed its first penalties of $1 million on the defendant. Generally, the fiduciary financial advisor is one in a fiduciary relationship with their client and the former exercising the highest care standards as per the regulations. The requirement identifies the comparable vulnerable circumstance of the client and the special trusts placed in the advisor. Therefore, the financial advisor has two obligations: placing the clients’ best interests first ahead of individual gains and avoiding conflicts of interest.
Fiduciary Relationship and Contract Law
It is evident that when the company chooses a party as the director, the latter will automatically have a fiduciary duty towards the former. However, fiduciary duty will only exist for the financial advisor when the advisor has voluntarily accepted the well-established obligations, or their actions have gone beyond being a “mere salesman.” Notably, these causative events of fiduciary obligations will determine whether the fiduciary obligations have a relation to their contractual obligations. Generally, the contractual obligation will come for the obligor voluntarily accepting to do them. The contract law is customarily considered a paradigm of private-power conferring laws. Therefore the fiduciary obligations have been voluntarily acquired. Therefore, considering the advisor has voluntarily assumed the fiduciary obligations or his actions imply being a fiduciary agent, their obligations are contractual obligations. The same applies to the director; accepting their position as a director who will act in the company’s best interests means that the director has accepted the respective contractual obligations.
Generally, fiduciary relationships will have the fiduciary in one way or another having a particular set of legal obligations, powers, privileges, immunities, among other elements. When one is considered a company director, it will have the legal powers to make particular executive decisions for the company and have particular fiduciary duties to their shareholders (Klass, 2016). Such an understanding of the fiduciary functions suggests an intense similarity between the fiduciary relationships created legally and any contractual agreements. The new obligation to perform in contracts usually is salient, but it comes with powers, privileges, immunities, among other elements. The law concerning contracts and fiduciaries has granted the individuals top objectively effect change in their legal relationships with others. Therefore, some fiduciary obligations are best comprehended to be an outcome of private legislative operations comparable to the p[ower-conferring object in contract law (Klass, 2016). The financial advisor that has accepted the fiduciary obligation, whether expressed or implied and the company director that has accepted and been conferred the respective obligations are indeed acting within their contractual obligations.
Ethical Conduct from the Financial Advisors and the Company Directors.
Whether one is a fiduciary relationship with an imposed fiduciary duty, the obligor must act ethically in their relations with the principal. Ethical conduct encompasses being honest, integrity, trustworthy, being accountable, and transparent. Ethical conduct is a significant determinant in the viability and success of respective clients or organizations in the long-run. To this effect, the financial advisors and company directors are required ethically as per their company’s and industry’s code of ethics. Notably, acting ethically will mean that the parties have identified the conflicts of interest within their operations. It is essential that the party declares and manages the client’s conflict to maintain trust and confidence towards their entity. Typically, the court indicates that the director’s duty to act ethically encompasses the duty to avoid any conflict, which would make a reasonable individual question whether the client’s interests were put first or not. Therefore, the director and financial advisor that is acting ethically would be characterized with acting in good faith, acting in the best interests of the entity, showing care, diligence, not misusing their positions or information, avoiding the conflicts of interests and insolvency, and retaining discretion (DHHS Directors Toolkit, 2020). It is the fiduciaries’ mandate to understand their respective code of ethics and act under it regardless of the capacity in which one is in.
Generally, not every undertaking by any individual should be considered a fiduciary relationship. For a fiduciary relationship to exist, there should be a pledge to act or behave in a particular way (Edelman, 2013). As illustrated in the paper, the Australian Law and common law have clearly illustrated that the company director has a fiduciary relationship with the company. They owe the latter a fiduciary duty. For the financial advisor, one needs to voluntarily accept the well-established obligations or act in a manner that implies being a fiduciary agent. Nonetheless, the fiduciary duty will be the same to their clients, including the duty of loyalty, care, and meeting the client’s interests. Furthermore, the fiduciary relationship does confer contractual obligations to the fiduciary.
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