Advanced Palette Lists mode is disabled by default to avoid cluttering a basic workflow with too many options, but it enables palette management capabilities that are very useful for big productions. Mainly, this preference allows you to:
Create palettes inside a scene's environment, job or element palette-library directory, instead of the scene's palette-library directory. Storing a palette at the environment or job level can be especially useful if you want to use the same palette in several scenes without creating dependencies between animation scenes and colour model scenes.
Create palettes for specific elements instead of the entire scene. You can do this by adding, importing or linking to a palette in an element's palette list. A palette in an element's palette list can only be used by that element.
You can set up the Advanced Palette Lists option in the Preferences panel.