Definition (short)
An agent is a person or firm legally empowered to act for another party (the principal). In many commercial settings the agent can negotiate or complete transactions on the principal’s behalf. In finance, an agent typically has a fiduciary relationship — legally required to act in the principal’s best interests when performing authorized tasks.
Common types of agents
– Universal agent: Very broad authority to act for the principal (often under a power of attorney). Can cover most legal and financial decisions.
– General agent: Ongoing authority in a defined area or for a class of transactions (for example, a talent manager who negotiates multiple contracts for a performer).
– Special agent: Authority limited to a single transaction or a specific, time‑limited task (examples: many real estate agents, insurance agents, travel agents).
Why principals hire agents
Principals engage agents when they lack time, expertise, licensing, or contacts needed to transact efficiently. Examples: investors hiring brokers, homeowners using listing agents, businesses appointing negotiators.
Key legal authorities and limits
– Express authority: Written or spoken authorization that specifically defines what the agent may do.
– Implied authority: Actions inferred from the relationship or industry customs.
– Licensing/registration: Many agent roles require industry licenses (e.g., brokers, real estate agents). Operating without required credentials can lead to fines or prohibition from acting as an agent.
Core duties an agent owes the principal (loyalty and conduct)
These duties arise from the fiduciary character of the agency relationship:
– Loyalty: Put the principal’s interests ahead of the agent’s personal gain.
– Avoiding hidden material benefit: Don’t accept extra benefits tied to the agency beyond agreed compensation unless fully disclosed and consented to.
– No usurpation: Don’t take opportunities discovered through the agency for yourself without consent.
– No competing: Don’t conduct business that competes with the principal while representing them.
– Transparency and disclosure: Reveal relevant facts, other principals, or conflicts of interest.
– Protect confidential information: Keep proprietary or sensitive information private unless the principal permits disclosure.
Performance and procedural duties
– Duty to follow contract terms and lawful instructions (obedience).
– Duty of care: Act with the competence and prudence expected in the agent’s role.
– Duty of disclosure: Inform the principal of material information needed to make decisions.
– Duty of separation: Keep the principal’s property or money separate from the agent’s personal assets; avoid commingling.
Liability and special situations
– Agents can be personally liable if they act outside their authority, breach duties, or commit negligence.
– Agency by necessity: In emergencies (no time to consult the principal) an agent may act to protect the principal’s interests; such actions generally require reasonableness and later ratification.
Practical checklist — for principals hiring an agent
1. Verify required licenses/registrations for the industry.
2. Define scope of authority in writing (express authority and limits).
3. Specify compensation and permitted third‑party payments.
4. Include confidentiality and conflict‑of‑interest clauses.
5. Require regular reporting and written disclosures of other principals.
6. Set termination conditions and remedies for breach.
7. Keep copies of all communications and signed agreements.
Practical checklist — for agents accepting an appointment
1. Confirm your legal authority to act and obtain necessary licenses.
2. Get express written terms that define the job, limits, and pay.
3. Disclose any other clients, relationships, or payments that might cause conflicts.
4. Keep the principal’s funds and property separate and well documented.
5. Maintain confidentiality and document material information delivered to the principal.
6. Seek consent before taking actions that could benefit you beyond agreed compensation.
7. If an emergency forces action, record facts and notify the principal promptly.
Worked numeric example (real estate commission)
Assume a home sells for $400,000 and the listing agreement sets a 5% commission.
– Total commission = 400,000 × 0.05 = $20,000.
– If that commission is split 50/50 between listing broker and buyer’s broker, each side receives $10,000.
If the listing agent also accepted an undisclosed $2,000 referral fee from a contractor connected to the buyer, the agent would likely be breaching the duty to avoid hidden material benefits and should have disclosed and obtained written consent. The principal could seek remedies for nondisclosure.
Step‑by‑step to create a basic agency agreement
1. Identify the parties (principal and agent) and effective date.
2. State the scope of authority (what the agent may and may not do).
3. Specify compensation, timing, and permitted reimbursements.
4. Include confidentiality, conflict disclosure, and noncompetition (if applicable).
5. Describe reporting requirements and how/when the agent must communicate material information.
6. Add termination provisions and remedies for breach.
7. Signatures and verification of required licenses or registrations.
Fast facts
– Not every representative is an agent; a fiduciary relationship and authority to act distinguish an agent.
– Written agreements reduce disputes about scope and duties but implied agency can arise from conduct and custom.
– Agents may be disciplined or face civil liability for breaching fiduciary duties or acting without required licenses.
Sources for further reading
– Investopedia — “Agent”: https://www.investopedia.com/terms/a/agent.asp
– Cornell Law School, Legal Information Institute — “Agency”: https://www.law.cornell.edu/wex/agency
– U.S. Securities and Exchange Commission (SEC) — Brokers and dealers (fast answers): https://www.sec.gov/fast-answers/answersbdhtm.html
– Financial Industry Regulatory Authority (FINRA) — Introduction to brokers: https://www.finra.org/investors/learn-to-invest/types-investments/intro-brokers
Educational disclaimer
This explainer is for educational purposes and does not constitute legal, tax, or investment advice. For decisions about appointing or acting as an agent, consult a qualified attorney, licensed broker, or other relevant professional.