An advertising agency or ad agency is a service business dedicated to creating, planning and handling advertising for its clients. An ad agency is independent from the client and provides an outside point of view to the effort of selling the client's products or services. An agency can also handle overall marketing and branding strategies and sales promotions for its clients.

Volney B. Palmer opened the first American advertising agency, in Philadelphia in 1850. This agency placed ads produced by its clients in various newspapers.

Stringfe This 1860s advertisement by photogapher John Stringfellow is an example of an early advertisement with distinct fonts. In 1856 Mathew Brady created the first modern advertisement when he placed an ad in the New York Herald paper offering to produce "photographs, ambrotypes and daguerreotypes.His ads were the first whose typeface and fonts were distinct from the text of the publication and from that of other advertisements. At that time all newspaper ads were set in agate and only agate. His use of larger distinctive fonts caused a sensation.Later that same year Robert Bonner ran the first full-page ad in a newspaper.

In 1864, William James Carlton began selling advertising space in religious magazines. James Walter Thompson joined this firm in 1868. Thompson rapidly became their best salesman, purchasing the company in 1877 and renaming it the James Walter Thompson Company, which today is the oldest American advertising agency. Realizing that he could sell more space if the company provided the service of developing content for advertisers, Thompson hired writers and artists to form the first known Creative Department in an advertising agency. He is credited as the "father of modern magazine advertising" in the US.

Ad agencies come in all sizes and include everything from one or two-person shops (which rely mostly on freelance talent to perform most functions), small to medium sized agencies, large independents, and multi-national, multi-agency conglomerates such as Omnicom Group, WPP Group, Publicis, Interpublic Group of Companies and Havas.

Most full-Service agencies work on a combination of fee-based and commission based compensation. The fee is paid by the entity for which the marketing is being done. The commission is a payment from the media to the agency and is usually equal to 15% of the cost of the advertisement. The broadcast media, radio and television, traditionally pay a commission.

Full-service, or media-neutral advertising agencies produce work for many types of media, creating integrated marketing communications, or through-the-line (TTL) advertising. The "line", in this case, is the traditional marker between the media that pay a commission to the agency and the media that do not.

Interactive Agencies may differentiate themselves by offering a mix of Web Design/Development, Search Engine Marketing, Internet Advertising/Marketing, or E-Business/E-Commerce consulting. Interactive agencies rose to prominence before the traditional advertising agencies fully embraced the Internet. Offering a wide range of services, some of the interactive agencies grew very rapidly, although some have downsized just as rapidly due to changing market conditions. Today, the most successful interactive agencies are defined as companies that provide specialized advertising and marketing services for the digital space. The digital space is defined as any multi-media enabled electronic channel that an advertiser's message can be seen or heard from. The 'digital space' translates to the Internet, Kiosks, CD-ROMs, DVDs, and Lifestyle Devices (iPod, PSP, and Mobile). Interactive Agencies function similarly to advertising agencies, although they focus solely on interactive advertising services. They deliver services such as strategy, creative, design, video, development, programming (Flash and otherwise), deployment, management, and fulfillment reporting. Often, Interactive Agencies provide: Digital Lead Generation, Digital Brand Development, Interactive Marketing and Communications Strategy, Rich Media Campaigns, Interactive Video brand experiences, Web 2.0 website design and development, e-Learning Tools, email marketing, SEO/SEM services, PPC Campaign Management, Content Management Services, web application development, and overall Data Mining & ROI Assessment.

Lately, Search Engine Marketing (SEM) and Search Engine Optimization (SEO) firms have been classified by some as 'agencies' because they create media and implement media purchases of text based (or image based, in some instances of search marketing) ads. This relatively young industry has been slow to adopt the term 'agency', however with the creation of ads (either text or image) and media purchases, they do technically qualify as 'advertising agencies'. Recent studies suggest that both SEO and SEM are set to outpace more traditional channels of media spending over the next 3-5 years.

The recent boost in Interactive Agencies can also be attributed to the rising popularity of web-based social networking and community sites. The creation of sites such as MySpace, Facebook and YouTube have sparked market interest, as some Interactive Agencies have started offering personal and corporate community site development as one of their service offerings. It still may be too early to tell how agencies will use this type of marketing to monetize client ROI, but all signs point to online networking as the future of brand marketing.

Not all advertising is created by agencies; companies that create and plan their own advertising are said to do their work in-house.