Principal-Agent Relationship 

A 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 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.

The 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 non-profit organization, a government agency or a partnership.

 A principal appoints an agent to act on their behalf and in their best

interest. Examples include an investor picking a fund manager or
someone hiring an attorney for legal work. 
 There should be no conflict of interest between the two, if there is, this
creates a principal-agent problem. 
 The principal-agent relationship is expressed clearly through a written
contract or is implied through actions.

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