UPDATE 1-Citi building own US investment adviser business

* Plans to build relationships with independent advisers

* Bank also has advisers that sit in branches

* Advisers will be fee based, not commission based

* Analysts say strategy could be difficult to execute (Adds analyst comment, detail)

By Dan Wilchins

NEW YORK, Oct 5 (Reuters) - Citigroup (C.N) said on Monday it is building its own retail investment advisory business, after announcing plans last month to sell all of its Smith Barney retail broker business to Morgan Stanley over time.

Analysts said that Citigroup's strategy could be difficult to execute, and that many banks have failed at similar efforts in the past.

Citigroup is starting the business with 600 advisers who sit in Citibank branches or operate next door to branches and are not included in the Smith Barney deal. The bank also is looking to build relationships with independent advisers, who will pay fees in exchange for client referrals.

Citi's current brokers will start charging annual fees to clients, rather than commissions on transactions.

The moves follow Citigroup's sale of a controlling stake in its Smith Barney business to Morgan Stanley (MS.N) in June for $2.75 billion. Although Citigroup retained some brokers after that sale, it did not have a clear strategy for building that part of its business, or winding it down.

Citigroup is trying to figure out a way to not just accept deposits and make loans to its retail banking clients, but also to manage their overall financial portfolio, an effort that banks have made for years -- and failed at.

Major Citigroup competitors Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N) have large U.S. retail bank branch networks, and large retail brokerages.

Citigroup has a relatively small branch network and is starting off with a small number of advisers.

"We're creating a different model here," said Deborah McWhinney, head of Citi Personal Banking and Wealth Management.

Combining the two businesses gives a bank access to more of their client's financial life, potentially generating much more revenue.

But brokers and investment advisers tend to be focused on selling products to customers, ideally knowing their customers very well, and helping them plan their entire financial lives. Retail bankers tend to focus on providing service and underwriting loans as the customer needs them. Getting these two cultures to work well together has proven difficult for many banks.

Citigroup, meanwhile, is starting with a very small foundation. It has about 1,000 bank branches in the United States, compared with more than 6,000 each for Wells Fargo and Bank of America. To build up a network of trusted advisers could take a good deal of time and effort, analysts said.

"The hard part of this strategy is going to be staying committed and executing," said Ralph Cole, a portfolio manager at Ferguson Wellman Capital Management.

Citigroup Chief Executive Vikram Pandit said at a conference last month that the bank expects to sell the rest of the business to Morgan Stanley over time. When the deal was announced in January, Smith Barney had about 12,000 advisers. (Reporting by Dan Wilchins; Editing by Gary Hill; editing by Carol Bishopric)