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MENTOR ME CAREERS

Agency by Necessity: Explained with Super Simple Examples

So, lets assume that you had invested in a liquid mutual fund, which is often used for parking short term funds. And due to a sudden drop in the value of the underlying, the investment amount was due to crash. Now, since there are millions of customer, there was a choice which was to be made to either restrict the withdrawls. This situation is what is calls for the agency by necessity.

However, the concept of agency by necessity in finance majorly happens during investment decision making. Because there are so many situations where there can arise situations. When the portfolio manager, broker or any other intermediary might have to act for the benefit of the customer.

agency by necessity

The Meaning of Agency by Necessity

So, agency by necessity is a legal siuation where one party can make essential decisions for another party. Untill the beneficiary has appointed a legal guardian or has been given the power of attorney. Even the courts recognize such urgent situations where the agency has to act for the sole benefit of the benefiary.

So I can summarize the meaning of agency by Necessity in the following points;

  • Firstly it allows some person or entity to act on behalf without explicit permissions.
  • Secondly, the situation for such decisions have to be urgent
  • Finally, in finance this situation can be created in relations like broker, portfolio manager, or advisor.

Example of Agency By Necessity

A very simple example to understand agency by necessity is to understand it through an example.

Example 1: General

Let’s say you were travelling on a vacation and were unreachable for long time. Your apartment had a gas leak and there was fire. The neighbour broke into the house, got the fire under control but in this event he had to cause some damage to your apartment. This is nothing but an urgent situation application for agency by necessity.

Example 2:Finance

You had around 0.5 Million dollars in your trading account. You had taken certain leveraged positions in derivative contract. On one such contract you had not squared the contract but you had put a stop loss. However, since you became unwell you were hospitalized. During the same time, your broker noticed that your stop loss had been breached. And this could cause severe loss to you. The broker tried to reach you but couldn’t get through. The broker decided to square off the positions. Another example where the broker acted on agency by necessity.

In most of the usual day to day matters, this challenge doesn’t really arise. However on certain financial matters or inheritance matters, the beneficiary can be unsatisfied by the decision taken by the agent. In such situations there can be a case where the beneficiary approaches the court seeking relief on the decision. However, the burden of proof to prove that the agent did not act for the benefit of the beneficiary would like with the beneficiary.

Also, courts woulf also use nature equity and justice concepts to see whether the agent under reasonable situation had no option but to act the way he did.

Importance

The concept of agent by necessity is essential especially in the field of portfolio management. And the reason is that there are so many situations that occour during this relationship when the portfolio manager has to take certain decisions for the benefit of the client. This situations can arise due to risk management, operations, compliance etc.

FAQ’s

What are the conditions required for agent by necessity?

The basic conditions should be that the situations should be urgent and there are are certain commercial or fidicuary relationship that exit. Also there is an absence of an existing agent to act on such decisions

What are the problems that occour in this situation?

The usual problems that occour are legal when the benefiary is not satisfied with the outcome of that decisions

What are other methods by which relationship like principal -agent which may arise?

The situation include

  • By necessity
  • Implied situations
  • Estoppel
  • Its allowed by the principal
  • And there an express agreemtn that exisits