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'@Rabagast, if you don't plan on making local changes, then I suppose the "keep local changes" option doesn't really matter either way. It's really only if you make local changes, as TAP explained, that you'd want to pay attention to it.
@TAPgiles, the option is in the bottom, left corner of the screen in the update tool. It's kind of important and should really be more prominent in the center, IMO.
By the way, another great use of keeping your assets separate from your main scene is being able to make changes to a bunch of non-live clones. For example, I had a whole forest made up of clones of a few trees imported from a separate "trees" scene. I later decided to change the color of all the trees, so I just changed them in the "trees" scene once, then updated the main scene with hundreds of clones. I had already made some local changes to give some of the trees more/less leaves, so I kept local changes. :)