Stock broker
A fiduciary is a person who is entrusted to act in the interests of another. Fiduciary duties are the duties of a fiduciary to act in that other persons interests without gaining any material benefit except with the knowledge and consent of that person. The concepts of a fiduciary and of fiduciary duty originated in common law for cases in which one person entrusts property to another, but these concepts have been expanded over time to other trust-like situations in which one person relies on anothers superior knowledge or skill. Thus, a stockbroker is a fiduciary with regard to any funds that are given for safekeeping, but the stockbroker also has the duties of a fiduciary in so far as he or she gives investment advice or keeps custody of client funds.
The fiduciary relation closely resembles the relation of agent and principal, in which one person; the agent has been engaged to act on behalf of another, the principal. Whereas fiduciary relations arise when something of value is entrusted to another person, agency relations are due to the need to rely on others for their specialized knowledge and skills. For example, selling a house requires considerable knowledge and skill, as well as time, and so a seller may engage a real estate agent to act on the sellers behalf. A real estate agent becomes, in effect, an extension of the seller, with a duty to use his or her abilities solely for the sellers benefit.
The duties in both kinds of relations tend to be open-ended. That is, the specific acts that ought to be performed are not fully specified in advance, and fiduciaries and agents have wide latitude in the choice of means to advance the interests of others. Aside from the positive duty of an agent to act in the interest of a principal, there is a negative duty to avoid advancing personal interests in the relation. This duty is expressed in the Second Restatement on Agency as an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency. The scope of the agency relation is left vague in this statement, but agents, as well as fiduciaries, have a clear duty to avoid self-dealing by using property or information for personal gain. However, fiduciaries are generally held to a higher standard of conduct that that expected of agents or parties to a market transaction. The standard for evaluating the conduct of fiduciaries and agents is generally expressed in law as acting with due care or in good faith.
Conflict of interest:
Fiduciaries or agents have an obligation to avoid conflicts of interest, which are situations in which a personal interest actually interferes with the ability of the person to serve the interests of others. A conflict of interest also occurs when a person or an organization is pledged to serve the interests of two competing parties, like a lawyer who represents both parties to a dispute. Conflicts of interest are present in every sector of the financial services industry and constitute a major concern of financial ethics. The basis of this obligation is that fiduciaries or agents are generally paid for their services, so that, in a sense, someone else buys their loyalty. To be in a conflict of interest, then, is to fail to deliver what has been bought. A client who has paid a stockbroker to be his or her agent, for example, has to right to expect selfless service, and a broker who puts his or her interest ahead of a clients has failed to provide the agreed-upon service. Similarly, a bank or investment firm that is advising clients on opposing sides of a deal cannot give undivided loyalty to both clients.
Conflicts of interest take a variety of forms. Most of the common occurs when an interest leads to biased judgment. Fiduciaries and agents are typically called upon to exercise judgment on behalf of others, and their judgment can be compromised if they stand to gain personally by making one decision rather than another. For example, let us consider a question of selling in-house funds. Should brokers who work for large investment firms receive a higher commission for selling the firms own mutual funds than for selling funds of other companies Higher commissions provide an incentive for a broker to steer clients to funds that may or may not be in the clients best interests. Whether the commission structure creates a conflict of interest depends on what the broker is being paid to do. If the broker is merely a salesperson with no further relation with a client, then the broker has only the obligations of a salesperson.
Confidentlality:
Confidentiality is at once a common feature of financial ethics and the cause of some of its most difficult ethical dilemmas. The need for confidentiality arises from the fact that people in finance, in order to do their work, must have access to sensitive, privileged information, and this kind of information will generally be revealed by those who have it only under a pledge of confidentiality. This willingness can be obtained, moreover, only if the provider is assured that the information will be held in confidence and used only for the purpose for which it was provided. Sometimes this assurance is provided by an explicit contract, such as a confidentiality agreement. It is also implicit in the agency relation.
Agency theory:
Negotiating a contract is merely the beginning of a relation that requires constant monitoring. Once a bargain is struck, steps must be taken to ensure that each party abides by the agreement. Agreements in which one party has agreed to act in the interests of another, which are especially difficult to monitor, are the subject of agency theory. An agency relation is one in which one person, called the agent, and agrees to act for the benefit of another, the principal. Agency relations are common.
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