It is just used as a reference point so you know where you are pointing. This of course is a relative of the "Hand" we see on the Wii Menu, and in Wii Sports.
If you have a target(s) anywhere around you, if you point the fairy on the enemy, you can press z to select him instantly, rather than struggling to catch a target by just looking at him... (sometimes the arrow that allows you target something doesnt pop up, such as if they're on high ground, thats when the pointer comes in handy) Also it helps when your swarmed, you can select who you wanna hit, rather than clicking z constantly till you get the right one...