If You Take on Your Broker, You're Likely to Lose

Further, Fienberg said, comparing losses initially claimed with the monetary damages ultimately awarded doesn't accurately reflect what might have happened during the arbitration process. During the process, an investor may voluntarily reduce his or her claim, she said.

Last year, 4,614 investor complaints went to NASD arbitration. That's down from 6,074 in 2005. The NASD's data show that investors were awarded damages in just 42 percent of the cases decided last year. Complaints filed most often included breach of fiduciary duty and contract, misrepresentation and claims that an investor was sold an unsuitable investment product.

Certainly the authors of this study aren't unbiased. Solin represents investors in large cases against major brokerage firms. O'Neal's firm provides expert witnesses to law firms.

Still, the two have a valid point in questioning the practice of allowing industry insiders to decide on arbitration cases.

In 1987, the Supreme Court ruled that brokerage firms could compel investors to settle their disputes through arbitration. In a dissenting opinion, Justice Harry A. Blackmun said that despite whatever safeguards are put in place, "the investor has the impression, frequently justified, that his claims are being judged by a forum composed of individuals sympathetic to the securities industry."

In light of all the recent investment scandals, investors are entitled to a panel of arbitrators with no connection whatsoever to the securities industry.

Fienberg said it helps to have someone on the arbitration panel familiar with industry practices. I understand that reasoning.

But the standard should be to avoid even the appearance of partiality.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.

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