We new it was coming. Discount broker Firstrade recently notified us that they are changing their mutual fund policy.

Starting February 15th (or March 15th if you have an account), Firstrade moves to a more traditional commission structure for buying and selling mutual funds in brokerage accounts – a.k.a. mutual fund supermarkets.

Customers will now have to pay to buy and sell no-load funds unless those funds kick back 12b-1 fees to the broker to be on the brokers “no transaction fee” (NTF) list.

In an effort to land new accounts, Firstrade had allowed buying and selling of ANY fund on their list of thousands for no fee - even cheapo funds like Vanguard 500 (VFINX), so long as investors didn’t sell for 180 days.

Low fee funds don’t skim enough fees from shareholders to pay a kickback and are usually not on NTF lists. This loss leader was a boon to fund investors who want the convenience of owning all of their funds in one place, yet the costs of buying funds directly from fund companies.

We’ve been recommending Firstrade as the best choice for fund investors because of this deal –though we knew it had to end someday. The last broker we recommended for the same deal (Scottrade) eventually stopped offering free fund trading as well.

Like Scottrade, those who loaded up on Vanguard and other low fee funds (like say, me) for no transaction fee, will soon have to pay a transaction fee to sell. (Why the FTC isn’t cracking down on this is a mystery – what if they started charging $5,000 to sell after you got in on “free trades”?)

That said, Firstrade’s new fee structure - $9.95 to buy or sell a non-NTF fund is still lower than anybody else – Scottrade charges $17, E*Trade $20, Schwab – you don’t even want to know… Plus Firstrade shortened the short-term redemption fee period to 90 days and now has over 10,000 funds available.

In December, the S&P500 climbed 1.40% and the Dow 2.11%, while the NASDAQ slipped 0.68%. Small cap stocks rose, but only 0.34% (as measured by the Russell 2000 index), and bonds were weak as interest rates inched back up. The Lehman Brothers Long Term Treasury Index was down 2.14%, while the Vanguard Total Bond Index, which is less sensitive to interest rate shocks, fell by just 0.48%.

Picking mutual funds is tricky business. That’s why most individual fund investors underperform the S&P 500 index. But in theory it should be easier than choosing stocks. The expert fund managers are doing the difficult work of picking the stocks to buy and sell. Investors just have to pick the right pickers.

There are dozens of reasons a mutual fund that had been a top performer can suddenly stop performing well. Professional fund analysts exist to look beyond the mere data and do actual fund manager interviews and additional research. Morningstar, the world’s premier mutual fund research company, has a sea of analysts keeping tabs on the growing (and growing….) list of funds. The job of these analysts is to choose the cream of the fund crop.

Morningstar recently updated the performance of their fund analyst picks. At first blush, the results look quite good.

As their director of mutual fund research concluded, “I'm pleased to see that our picks delivered superior returns.” The test was relatively simple: “Basically, we compare each fund with its peer group and ask whether it outperformed its peer group during the time when it was a pick.” In other words, if a fund analyst picks Super Duper Large Cap Value Fund as a large-cap value fund pick, does it beat the returns of most of the large-cap value funds going forward?

“For the trailing five years, it's 65%.” Not bad. That is, until you compare Morningstar analysts’ performance to some alternatives.

The end of the year is a tough time for fund investors. December is when most fund companies make large taxable distributions. December is particularly punishing after a few good years of stock market returns, which can lead to gains on the fund’s books that have to be distributed. These distributions are not good things. Unfortunately, year-end distributions are hard to avoid completely.