What Are Fiduciary Bonds? – Everything You Need to Know
Who Is a Fiduciary?
A fiduciary refers to a person or party in a position of trust. A fiduciary is required to act in the best interest of others with whom he interacts, at all times exercising his skill and judgment for the benefit of those who need help, not self-gain.
The most common type of fiduciary is an executor or personal representative for an individual’s estate after death, but there are many other types. People may serve as trustees, guardians, conservators, administrators on estates if they are charged with looking after someone else’s assets or well-being.
Fiduciaries also include attorneys acting on behalf of another client, stockbrokers holding assets belonging to their clients, insurance agents, investment brokers, and real estate agents.
What Is a Fiduciary Bond?
A fiduciary bond, also known as a fidelity bond, is an insurance policy or surety bond for people who serve in positions of trust when it comes to others’ assets or well-being.
This type of insurance ensures that loss will be covered if the fiduciary misappropriates assets or defrauds others because he was not acting in his clients’ best interests.
Example of a Fiduciary Bond
An example of a fiduciary bond is when a person, say, Mr. Shapiro, a man of old age who can no longer manage his affairs, hires a fiduciary, Ms. Lewis, to manage his assets and investments for him.
If something should happen to Mr. Shapiro and Ms. Lewis is found to have mishandled any of his money or investments, a fiduciary bond would protect him from any legal damages that may come about as a result.
Benefits of a Fiduciary Bond
There are several benefits to having a fiduciary bond in place:
Reimbursement in Case of Fraud or Theft
The main benefit of a fiduciary bond is that it provides reimbursement for any losses caused by the fiduciary’s dishonest or fraudulent actions. This can help to protect the person or persons who hired the fiduciary from any financial losses they may suffer.
Peace of Mind
Peace of mind is another benefit of having a fiduciary bond in place. Hiring someone to provide you with financial advice or management can be stressful, but knowing that the benefits of a fiduciary bond are protecting you helps alleviate some of those worries.
Protection of Assets
A fiduciary bond can also help to protect the assets of the person or persons who hired the fiduciary. If a fiduciary is mishandling assets, mismanaging investments, or engaging in any other type of fraudulent activity, the fiduciary bond will help to cover those losses.
Types of Fiduciary Bond
There are several different types of fiduciary bonds. Below are some including their descriptions:
Personal Representative Bond
A personal representative bond is to protect the executor or administrator’s work in settling an estate that involves real property; this includes houses, buildings, and other kinds of land.
An executor bond protects the interests of heirs when there are assets to distribute after someone dies. The bond also covers any mishandling of funds managed for distribution including embezzlement by the executor.
A trustee bond protects a person who has been given control over another person’s money or property due to being named in a will or trust document. The trustee bond ensures that all responsibilities are followed through until ownership passes on to the beneficiary(ies) named within the trust document.
An administrator bond is similar to a trustee bond, but it covers an estate that has been opened due to the death of the person who was responsible for managing their financial affairs. This type of bond is also used when there is no will or trust document in place.
A conservatorship bond protects the assets of a protected person, which are held by the conservator. The conservator is typically appointed by a court to manage the property and finances of someone unable to do so themselves due to age, illness, or some other incapacity.
A guardianship bond protects the assets of a minor or an incapacitated adult who has been placed under guardianship. The guardianship bond ensures that the appointed guardian will follow all court rules and is properly caring for their ward.
When choosing a fiduciary, it is important to do your research and make sure you are aware of the benefits of having a fiduciary bond in place. While there are some benefits, there are also risks associated with different types of bonds. Make sure you are aware of what you are getting into before entering into any contract or agreement.
By doing so, you can help protect yourself and your assets from any potential harm caused by dishonest or fraudulent activity on the part of your fiduciary.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.