Brackish water fish can adapt from freshwater to brackish or marine conditions within hours, sometimes instantly. So it's unlikely the fish is "failing" in some way.
Raising the salinity above 1.005 is going to kill the freshwater filter bacteria, or at least suppress their performance until the brackish water bacteria have come online. If you're going to raise the salinity with the fish in the tank, it has to be done very slowly, with constant checks of the nitrate level. If you took 6 months to go from 1.005 to 1.010 that would do the fish NO HARM at all, and would leave ample time for the bacteria to adapt. This isn't the ideal way to do things, but it does work, and I've done this many times.
The trick is to add slightly more saline water with each water change (e.g. 1.005 to 1.006), and then do a nitrite test the next day. If there's any sign of nitrite, don't raise the salinity further, and make sure you perform frequent water changes keeping the salinity steady. Add extra aeration if possible, and cut back on the food. Basically treat the tank as if it was halfway through being cycled. Raise the salinity a little bit more after 2-3 weeks. Keep testing the nitrite, and keep doing water changes if things aren't 100% perfect.
By the time you get to 1.010 the bacteria will be almost entirely brackish/marine ones and you can usually fluctuate the salinity more rapidly, if you need to. 1.010 to 1.012, for example, seems to be completely safe.
Algae is harmless, and in fact the fish like it. A diatom filter is almost totally pointless in this sort of aquarium. It does nothing for water quality (ammonium and nitrite, anyway). A UV filter might cut back on algae a bit, but a skimmer would be a much better (and less expensive) investment.
Cheers,
Neale