When it comes to investment advice, is the best option necessarily the least expensive? This question is at the heart of the current debate on broker-dealers' fiduciary duty to retail and retirement investors.

The Securities and Exchange Commission is studying whether to impose a uniform fiduciary duty on securities professionals to act in the "best interests" of investors when providing investment advice. And the Department of Labor recently proposed a rule to clarify the "best interest" duty owed to such investors under the Employee Retirement Income Security Act. What advisers' duty will be with respect to investment fees is a key question under both initiatives.

Information concerning investment fees already is widely available. SEC rules mandate fee disclosures in mutual fund prospectuses and other formats, and DOL regulations require ERISA fiduciaries to make detailed fee disclosures. The standardization of disclosures by the SEC in 2009 and the DOL in 2010 has made cost comparisons and investment decisions easier than ever.

However, increased availability of comparative cost information has led some investors to believe that the least expensive product is always the best alternative. Many increasingly expect the fiduciaries who advise them to recommend only the lowest-cost products. This view is inconsistent with well-established trust law principles and investment theory, and has been rejected by the DOL as a requirement of ERISA.

Nevertheless, courts have been swamped with class-action lawsuits by ERISA plan participants alleging that plan fiduciaries breached their duty of care by failing to make available least-cost or lower-cost investment alternatives. These lawsuits reflect a distorted view of the fiduciary duty of care to the extent they seek to make cost the operative factor in selecting investments. In its extreme form, this view excludes or minimizes other important considerations and could result in a narrowing of investment alternatives for plan participants.

One ERISA class action was the subject of a ruling by the Supreme Court last month. In Tibble v. Edison International, the court affirmed that ERISA derives its fiduciary standards from trust law principles, which are the result of decades of evolution based on judicial application of the law, economic analysis, academic study, and uniform codifications by the states. The fiduciary duty of investment advisers under the federal securities laws also is derived from trust law.

Trust law does not require trustees to invest in the "least-cost" investment available. Rather, it treats cost as one of many factors to be considered in an overall investment strategy incorporating risk and return objectives reasonably suited to the trust.

The principal factors include general economic conditions, the possible effects of inflation or deflation, the expected tax consequences of investment decisions, the role each investment plays in the overall portfolio, expected total return from income and capital appreciation, other resources of the beneficiaries, need for liquidity or regularity of income, and need for preservation or appreciation of capital.

The trustee's investment decisions are reviewed in the context of the investment portfolio as a whole. This standard reflects principles of modern portfolio theory, which recognize a relationship between the level of risk of an investment and the expected return.

Modern trust law enables a trustee to structure a diversified investment portfolio with varying degrees of risk in order to achieve risk and return objectives reasonably suited to the particular trust. The portfolio standard of care necessarily assumes that varying degrees of investment cost will be incurred. Riskier investments typically have higher fees and higher risk-reward ratios than less risky investments.

Trustees may incur only costs that are reasonable in amount and appropriate to the trustee's investment responsibilities. They are required to make careful cost comparisons, particularly among similar products, and must seek to minimize costs when devising investment strategies.

Neither the SEC nor DOL is likely to diverge from existing trust law and impose a duty on advisers to recommend only least-cost investments. However, because investment costs can significantly diminish returns over time, fees remain an important concern. Therefore, advisers should continue seeking to minimize investment costs and ensure that the fees associated with investments for retail and retirement investors are reasonable, appropriate, and properly disclosed.

Melanie L. Fein is an attorney in private practice who advises clients on bank regulatory matters, including compliance with trust and fiduciary law.