what is the principal agent relationship 
the principal agent relationship is an arrangement in which one entity legally appoints another to act on its behalf 1 in a principal agent relationship the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act the relationship between the principal and the agent is called the agency and the law of agency establishes guidelines for such a relationship investopedia joules garciaunderstanding a principal agent relationshipa principal agent relationship is often defined in formal terms described in a contract for example when an investor buys shares of an index fund he is the principal and the fund manager becomes his agent as an agent the index fund manager must manage the fund which consists of many principals assets in a way that will maximize returns for a given level of risk in accordance with the fund s prospectus agents have an obligation to perform tasks with a certain level of skill and care and may not intentionally or negligently complete the task in an improper manner 2the principal agent relationship can be entered into by any willing and able parties for the purpose of any legal transaction in simple cases the principal within the relationship is a sole individual who assigns an agent to carry out a task however other relationships under this guise have a principal that is a corporation a nonprofit organization a government agency or a partnership the agent is most often an individual capable of understanding and ultimately carrying out the task assigned by the principal common examples of the principal agent relationship include hiring a contractor to complete a repair on a home retaining an attorney to perform legal work or asking an investment advisor to diversify a portfolio of stocks in each scenario the principal is the individual seeking out the service or advice of a professional while the agent is the professional performing the work special considerationswhether the principal agent relationship is expressed clearly through a written contract or implied through actions the principal agent relationship creates a fiduciary relationship between the parties involved this means the agent acting on behalf of the principal must carry out the assigned tasks with the principal s best interest as a priority 3the agent is responsible for completing tasks given by the principal so long as the principal provides reasonable instruction additionally the agent has an obligation to perform tasks that will not intentionally harm the principal a duty of loyalty is also implied within the principal agent relationship which requires the agent to refrain from putting himself in a position that creates or encourages conflict between his interest and the interest of the principal also known as the principal agent problem 3