Well, this is very contextual on the type of advertising agency you are talking about, and the fields they work in.

1. The make money by charging for everything they do. The production costs for most adverts are considerably higher than those of the content they sit in between. If you've struggled to work on something in an editorial setting work in an advertising agency can seem like a financial playground, though it often feels like the money is being burnt (or going up people's noses).

2. Most ad agencies will take control of the art direction and development of the overal idea for an advert, making sure that all the relevant parts of it come together and handling the clients requriements whilst producing something which 'works' as an advert. On a larger scale the will advise and plan campaigns, not just adverts, and look at long term strategies for the development of a brand, is qualities and images. Some of them will handle media buying (buying TV/Radio/Magazine/Billboard space).

3. Not a trend I've noticed of late, but it depends on the size of the agency. New media orientated agencies often tend to try to cover all bases with a small multi-skilled creative team - hence the proliferance of lo-fi viral ads, where with bigger agencies they will tend to focus on the creative and execution of that, working with external talent to make it happen. There is no rule.

Why do you ask?

Not sure if this is relevant but from a photography agency side the relationship we have with ad agencies is predominantly with the art buyers, art directors & creative directors. On the odd occassion an account manager will call in photographers book. They will source in all the portfolios and the team go through the books and the account managers will also look through as they will have of an idea about what the specific client wants. They will then get in quotes from us/photographers/directors (which is normally frustrating as they usually have a budget they don't disclose). They then tend to go by which quote fits the clients budget and the chosen photographer/director gets put forward to the client. You may know all this but thought I would put in what I know. I look at it as there being a client then ad agency and then branching off from there are all the teams that are needed to execute an ad. So the ad agency acts as the middle man for the client. In terms of in house we have a photographer on our books who does all the photography and CGI on his shots this can sometimes pose a problem. Quite a few agencies now have in house re-touchers etc and they insist on keeping it all in house. But Dorians right it isn't necessarily a trend the larger companies have 20 odd art buyers and 20 directors so having an in house can cause more of problem than solution. The smaller companies tend to have in house but these can be negotiable. The photographer I mentioned we hire him out on the understanding he does all the work as that is his art not just taking photos and they usually accept. Hope that helped in some way... (or maybe just repeated what you know!)