What Is an Agent? Definition, Types of Agents, and Examples
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What Is an Agent?
An agent, in legal terminology, is a person who has been legally empowered to act on behalf of another person or an entity. An agent may be employed to represent a client in negotiations and other dealings with third parties. The agent may be given decision-making authority.
Two common types of agents are attorneys, who represent their clients in legal matters, and stockbrokers, who are hired by investors to make investment decisions for them. The person represented by the agent in these scenarios is called the principal. In finance, it refers to a fiduciary relationship in which an agent is authorized to perform transactions on behalf of the client and in their best interest.
Key Takeaways
- An agent is authorized to act on behalf of another person, such as an attorney or a stockbroker.
- People hire agents to perform tasks that they lack the time or expertise to do for themselves.
- A universal agent has wide authority to act on another’s behalf, but a general agent or special agent has more limited and specific powers.
- Agency by necessity is where an agent is appointed to act on behalf of a client who is physically or mentally incapable of making a decision.
- Most agent jobs require a license and registration with the appropriate state authorities.
Understanding an Agent
An agent is someone that is given permission (either explicitly or assumed) to act on an individual’s behalf and may do so in a variety of capacities. This could include selling a home, executing a will, managing a sports career, managing an acting career, being a business representative, and so on.
Agents often have expertise in a specific industry and are more knowledgeable about that industry’s ins and outs than the average person. For example, if you started gaining attention as a musician, you would hire a music agent to help guide you through getting a record deal, signing record contracts, and arranging your touring schedule.
As you would not have any experience with the record industry, you would need an agent to look out for your best interests and take care of a lot of the work that you would otherwise most likely not be able to complete on your own. This would also free up your time so that you can concentrate on making music.
Types of Agents
Agents come in all types depending on their function and the industry in which they operate. In general, there are three types of agents: universal agents, general agents, and special agents.
Universal Agents
Universal agents have a broad mandate to act on behalf of their clients. Often these agents have been given power of attorney for a client, which gives them considerable authority to represent a client in legal proceedings. They may also be authorized to make financial transactions on behalf of their clients.
General Agents
General agents are contracted to represent their clients in specific types of transactions or proceedings over a set period. They have broad authority to act but in a limited sphere. A talent agent for an actor would fall under this category.
Special Agents
Special agents are authorized to make a single transaction or a series of transactions within a limited period. This is the type of agent most people use from time to time. A real estate agent, securities agent, insurance agent, and travel agent are all special agents.
Practicing as an agent in a specific industry without the proper license or registration can lead to fines or being prohibited from acting as an agent in that industry in the future. Before working as an agent, ensure that you have obtained the right license, certification, and registration.
Uses of Agents
People hire agents to perform tasks that they lack the time or expertise to do for themselves. Investors hire stockbrokers to act as middlemen between them and the stock market. Athletes and actors hire agents to negotiate contracts on their behalf because the agents are typically more familiar with industry norms and have a better idea of how to position their clients.
More commonly, prospective homeowners use agents as middlemen, relying on the professional’s greater skills at negotiation.
Businesses often hire agents to represent them in a particular venture or negotiation, relying on the agents’ superior skills, contacts, or background information to complete deals.
Loyalty Responsibilities of an Agent
Duty of Avoiding Material Benefit
During the course of business, an agent may benefit. This is especially true when an agent is paid to perform a task on behalf of the principal. For example, a real estate agent commonly receives a commission for their work in selling a house.
When acting on behalf of another, an agent must ensure they do not unjustly benefit from their agency position. This includes receiving large benefits from the relationship or taking advantage of their position to ensure they receive benefits that would not normally as part of a normal transaction.
Duty Not to Usurp
When an agent acts on behalf of a principal, the agent may receive information it would be able to personally capitalize on for personal benefit. For example, an agent may receive information relating to a potential investment opportunity. The agent owes the principal the duty to not steal or supplant the principal’s ability to transact. In this example, the principal retains the right to decide whether or not to invest; the agent must not take the place of the principal without the principal explicitly declining an opportunity to invest.
Duty to Not Compete
On a similar note, an agent may not enter into transactions or business that compete with a principal. This conflict of interest puts the principal at a disadvantage as the agent may obtain trade or business secrets during the course of the business relationship. For example, imagine if an agent was tasked with shipping specific goods to an agent’s manufacturing warehouse. The agent could obtain information related to the principal’s operations that the agent could then use for its personal benefit.
Duty of Transparency
Formalized agent-principal arrangements often include verbiage that the agent must disclose if it has any other principals in which it is acting as an agent for. This includes disclosing a sworn statement that the agent will act in good faith across all principals and will incur fair dealing with each principal.
Duty to Protect Information
During the course of an agent’s relationship with the principal, the agent may not disclose confidential information to unrelated parties. This may defined through confidentiality agreements or may not be explicitly called out. In either case, the agent must take care to evaluate the sensitivity of information and the necessity for other parties to obtain that information. This includes not using confidential information for the personal benefit of the agent (i.e. exchanging the information for personal benefit to an independent third party).
An agent may have express authority (via a written contract) or implied authority (entered into agreement based on actions)
Performance Responsibilities of an Agent
Duty of Contract
All terms of any written agreement between an agent and a principal define the relationship between the two. For many agent and principal relationships, the contract is not explicitly defined upfront. However, custom or deliberate agreements may call for very specific terms that define what is and isn’t allowed.
Duty of Care
An agent is always tasked with acting with care and competence when handling affairs of the principal. The standard is often held that the agent must act as the principal would, using discretion as if it would incurring the personal gain or loss. Though the level of care may not be explicitly defined, the level of care should be equal to what is reasonably expected by local standards.
The duty of care may be complicated when considering the agent’s personal benefit potential. For example, consider a broker that receives a commission for the sale of certain investment products. For some clients, it may not be in their best interest to buy those investments. Therefore, the broker has the duty of care to not sell such products to those individuals, sacrificing personal gain to uphold the sanctity of the relationship.
Duty of Obedience
An agent must comply with reasonable instruction. Though there may be situations where acting on one’s behalf and following their guidance is not reasonable or legal, the agent may have recourse to not follow instruction. Otherwise, the agent is bound to perform tasks as expected by the agreement. This includes situations where the principal may be disadvantaged but has instructed the agent to act in a specific manner.
Duty of Disclosure
As the agent gains sensitive information that may influence the decision-making process of a principal, the agent has the duty to disclose that information in an accurate, timely manner. Consider the example of Los Angeles Dodgers’ player Freddie Freeman. Freeman’s agent reportedly did not disclose to Freeman that his former team, the Atlanta Braves, wanted to re-sign him. By withholding such information, Freeman reluctantly signed with a different team.
Duty of Separation
An agent also has the responsibility to keep the agent’s and the principal’s affairs separately. This includes ensuring that any transactions entered into on behalf of the principal are still legal property of the principal. This also ensures that any resources or capital used to transact are maintained in separate bank accounts and that separate reporting ledgers are maintained.
When acting as an agent, you are often protected from liability as long as you act with care, reasonableness, and transparency.
Agent Liability
An agent is often liable to their principal if they violate their duty or deviate from a reasonable, expected action performed on behalf of the other party. This may be the result of exceeding the authority they’ve been given, acting in misconduct, being unreasonably negligent, or any other situation where the principal may incur a loss that could have potentially been avoided.
In some situations when the agent performs a task for another without disclosing they are an agent, they may be considered liable because the agent was presumed to be a principal. An agent is also commonly liable when the agent expressly incurs a personal liability by entering into an associated agreement.
Agency by Necessity
There is also “agency by necessity,” in which an agent is appointed to act on behalf of a client who is physically or mentally incapable of making a decision. This is not always a case of incapacitation. Business owners, for example, might designate agents to handle unexpected issues that occur in their absence. For example, if a CEO was on a flight and unreachable yet an emergency business decision needed to be made, agency by necessity could be used.
Agency by necessity is most often executed in times of emergency or urgency when the primary party is not available to make a decision. In these situations, courts would recognize a third party making the decision if that party was given power by the primary party to do so. The third party would be responsible for acting in the primary party’s best interest.
Estate planning often sees agency by necessity. Though an individual may have created a will outlining how an estate should be disbursed at their time of death, there could be situations where the person became incapacitated before needed adjustments to the will were made. Here, agency by necessity could be used by a trusted party.
What Is an Enrolled Agent?
An enrolled agent is one that represents taxpayers in front of the Internal Revenue Service (IRS). To become an enrolled agent, one needs to pass an IRS test that covers individual and business tax returns or through experience by being a former IRS employee. Enrolled agents can represent any type of taxpayer over any tax matter in front of any tax department in the IRS.
What Is a Registered Agent?
A registered agent is an individual that is authorized to accept legal documents on behalf of a limited liability company (LLC). All LLCs require a registered agent and they are legally allowed to accept tax documents, legal documents, government documents, compliance documents, and any other documents pertaining to the LLC.
A registered agent for an LLC is known to be an “agent for service of processes.” If an LLC does not have a registered agent, it may be fined by the state, not allowed to file a lawsuit, be denied financing, and not allowed to expand out of state.
How Do You Become a Real Estate Agent?
To become a real estate agent, you need to obtain a real estate agent license. There are a few qualifications for this, and they can vary from state to state. In general, a person needs to be 18 years of age, be a legal resident of the U.S., complete the required relicense education, and pass the real estate exam. Individuals can enroll in relicensing courses before taking the real estate exam.
How Do You Become an Insurance Agent?
The first step in becoming an insurance agent is deciding what kind of insurance agent you want to be, as the type depends on the path to becoming one. You can choose to be either a captive insurance agent or an independent insurance agent. From there, you will need to decide what insurance products you would like to sell to clients.
The next step is becoming licensed in your state. The products that you decide you would like to sell will depend on the type of license you will need. You will take your licensing exam and from there you will have to submit a background check and license application to your state’s licensing department. Once this is complete, you will need to find an insurance company to work with.
How Do You Become a Sports Agent?
To become a sports agent you will need to obtain a sports license and register with the state. Not all states require this. The sport or league that you will want to join will require certification as well. Typically, a bachelor’s degree is required before becoming a sport’s agent, and advanced degrees, such as law, help in becoming one so that you can understand the legal language of the contracts of the clients you manage. Once you have been certified and received your license, you will need to join a sports agency and from there start building a client base.
The Bottom Line
An agent is anyone that has been entrusted to act on behalf of another individual. People usually call upon an agent when they need someone with more expertise or when they don’t have the time to complete a task.
Agents are commonly used in the finance, law, real estate, insurance, acting, and music industries, yet they can be found in almost any situation when advanced knowledge on a topic is needed. Agents can save people a lot of time, money, and headaches in getting important tasks done.
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