Define Agency in the context of financial relationships.

In the context of financial relationships, agency refers to a specific arrangement where one party, known as the agent, is authorized to act on behalf of another party, known as the principal. This relationship is central in various financial contexts, including in investments and fiduciary responsibilities, where the agent is entrusted to make decisions that align with the best interests of the principal.

This concept underscores the trust and expectations involved in such relationships. The agent has the authority to make decisions, execute transactions, and manage assets or funds for the principal, while the principal relies on the agent's expertise and judgment. Agency relationships are governed by legal and ethical standards, ensuring that the agent acts in good faith and within the scope of their authority.

The other options do not accurately capture this dynamic. Although managing funds on behalf of clients may describe one aspect of agency, it does not fully encompass the definition, as agency is about representation and authorization rather than merely fund management. A relationship where one party operates independently contradicts the agency concept, as it implies a lack of dependence or representation. Lastly, a legally binding financial contract is a broader legal concept and does not specifically define the agency relationship, which is rooted in authorization and fiduciary duty rather than just contractual obligations.