On the flip side, it can also be an asset. Believe it or not, not everyone likes the "you can play *anything* you want!" form of character creation.
I, personally, find I am more creative and interesting in my character concepts when I am given restrictions. I want to know the party needs a fighter, for example, because I am personally better at answering, "How do I make a fighter interesting?" than I am at answering, "What one concept do I want to play right now?"
I think the issue here is that whilst it breeds creativity for some people, those people could otherwise come up with perfectly good characters, and are unlikely to see their long-term enjoyment of the game compromised by having to come up with a character from a broad range of possibilities rather than narrow (I mean, it's easy to self-limit - or roll randomly or whatever).
So the maximum harm is minor inconvenience.
Whereas if a player is forced into a narrow range of possibilities, none of which strongly appeal, but where they feel they can't object, either (for whatever reason - usually this is due to a role being perceived as necessary, or not wanting to tread on toes - the latter usually due to some PCs being created before others), if they end up picking a PC they don't actually want to play, that can cause serious long-term problems, sometimes not just for them, but for the rest of the group too.
So the maximum harm there is serious long-term problems, potentially spreading to the group.
I'm not saying that gives us a "right answer", but it does perhaps tell us that DMs should consider their players, and try and find out who is "open to anything" and/or likes limitation, and ensure it's those guys who end up going last in the process (if it's sequential, as, in my experience, it often is), and gap-filling, rather than just letting it be a matter of whoever does it first.
With the groups I've run and played it, virtually every character generation has fit into 2), so that how I answered.