The second component is the Duty of Care. This requires the fiduciary to act with the competence and diligence that a reasonably prudent person would exercise in a similar situation. It is a standard of competence, not of perfection. A fiduciary is not liable for honest mistakes or for investments that perform poorly, provided they conducted thorough research and made a decision that was reasonable at the time. However, they can be held liable for making decisions that are reckless, grossly negligent, or made without proper diligence. For example, a trustee who invests a beneficiary’s entire inheritance in a single, highly speculative venture without any research would likely be found to have breached their duty of care.

Fiduciary relationships arise in many contexts. Corporate directors owe a fiduciary duty to their shareholders. Lawyers owe it to their clients. Trustees owe it to their beneficiaries, and agents owe it to their principals. The breach of this duty can have severe legal consequences, including financial liability for any losses incurred and the disgorgement of any profits the fiduciary improperly made. It is a legal concept designed to ensure that when one party places their trust and assets in the hands of another, that trust is honored with the highest possible degree of integrity.