While Merrill Lynch's (MER) days as an independent business may be over now that it's merging into Bank of America (BAC - Get Report), the company's brokerage division remains an important force in mutual funds.

In recent years, Merrill has made sweeping changes that are resulting in stronger fund sales and reduced costs for fund shareholders. After the financial crisis ends, Merrill and other brokers should continue leading the move toward lower fund expense ratios.

For years, Merrill Lynch managed and sold its own proprietary funds. In 1986, the Merrill Lynch funds ranked as the largest fund family, well ahead of No. 2 Fidelity Investments. At the time, the list of top fund groups was dominated by now-defunct brokerage names, including Paine Webber, E.F. Hutton and Dean Witter. To market funds, brokers sold aggressively, promoting shares that came with upfront commissions -- or loads -- of up to 8.5%.

By the 1990s, the broker-sold funds faced stronger challenges from no-load fund companies, such as Vanguard and T. Rowe Price, which impose no sales charges. Many of the no-load funds outperformed the proprietary brokerage offerings.

Profiting From Flexibility and Change

As investors became more savvy about costs and performance, the brokerage funds faced slowing sales. But Merrill Lynch brokers adjusted, shifting from load investments to funds sold without upfront sales commissions.

This change produced huge savings for investors. To appreciate how wide the cost cuts have been, consider that each time the load customer makes a purchase, he may have to pay a sales charge. The upfront sales loads are taken off the top. Say an investor wants to deposit $10,000 into a fund and pays a sales load of 5%. The broker pockets the $500 sales load immediately. The remaining $9,500 is invested in the fund and begins producing earnings for the shareholder.

But in recent years, Merrill Lynch, Smith Barney and other brokers have been switching from the old load business to what are known as fee-based accounts. In these accounts, the customer pays a flat annual charge of about 1% of assets, regardless of the number of purchases that are made.

Some plaintiffs' lawyers rail against the high loads and fees charged by brokers. But the reality is that the old-fashioned loads are almost gone. To assess the impact of loads, Strategic Insight, a fund research firm, recently surveyed advisor-sold fund companies, including Franklin Templeton, MFS and Oppenheimer.

These companies once depended on sales of shares with front-end loads. But in 2007, shares with loads of 4% or more accounted for only 6% of the $750 billion in total sales recorded by the group.

"Front-end loads have been marginalized," says Avi Nachmany, research director of Strategic Insight.

Just as the brokers have been chopping loads, they have also been steering investors toward funds with low annual expense ratios. While the old proprietary brokerage funds sometimes charged annual expense ratios of more than 2%, today brokers are promoting many choices with expense ratios of less than 1%. The shift has helped to lower average expense ratios for the fund industry overall. According to Strategic Insight, expense ratios on equity funds dropped from 1.05% in 2003 to 0.9% in 2007.

Part of the decline has occurred because investors -- whether they use brokers or invest by themselves -- have become more sophisticated about costs and performance records. Enticed by strong returns, investors have been racing into top companies, such as Vanguard and American Funds. These firms charge relatively low expense ratios, and the low-cost funds tend to outperform competitors that are burdened with high expense ratios.

Besides the new emphasis on returns, the lower fees can also be traced to a change in the philosophy of brokers. In the past, Merrill Lynch's army of financial advisors rarely sold no-load funds or index funds, which track benchmarks and are among the lowest-cost choices. Instead, Merrill preferred actively managed funds that came with hefty front-end loads, which maximized brokers' pay.

In the new world of fee-based accounts, the broker receives the same pay regardless of which funds the client picks or how many trades he makes. Now the broker has an incentive to keep the customer happy and boost the size of assets in the portfolio. To do that, Merrill Lynch brokers use funds from Vanguard and other no-load companies.

Retail clients at Merrill are among the largest users of Vanguard's exchange-traded funds, which are index funds. "For fee-based accounts, financial advisors are looking for low-cost investments, and that is what Vanguard supplies," says Martha Papariello, a principal with Vanguard.

As they have shifted to fee-based accounts, Merrill brokers have come to see themselves as playing a different role. In the past, some brokers viewed themselves as stock jockeys, advisors who could recommend the best trades to clients. But now many advisors focus on picking a few funds and designing the best asset-allocation strategies for clients. By crafting solid portfolios, the financial advisors may hold the loyalty of clients -- and perhaps enable what is left of Merrill to survive today's difficult markets.

Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.