First of all, currently, you have 5 different built-in options/ways to connect to browser drivers:
- specify seleniumServerJarto start selenium standalone server locally
- specify seleniumAddressto connect to a running selenium server (local or remote)
- set sauceUserandsauceKeyto connect to Sauce Labs remote selenium server
- set browserstackUserandbrowserstackKeyto use remote Selenium Servers via BrowserStack
- use directConnectto connect to Chrome or Firefox directly. There are additionalchromeDriverandfirefoxPathsetting that you can use to define custom Chrome driver and Firefox application binary locations.
The first 4 options basically work through a "proxy", a selenium server:
The server acts as proxy between your test script (written with the
  WebDriver API) and the browser driver (controlled by the WebDriver
  protocols). The server forwards commands from your script to the
  driver and returns responses from the driver to your script.
The main reason to automate browsers through an intermediate selenium server as opposed to direct webdriver connect is that selenium server, if acts as a Selenium Grid, allows you to expand/scale your tests across multiple browsers, multiple browsers on multiple systems, see, for instance, Sauce Labs Selenium Grid. FYI, there is also BrowserStack service, that, apart of other features, acts as a selenium server with, similarly to Sauce Labs, enormous amount of different capabilities/configurations - browsers and systems.
The other use case of starting up a selenium server (speaking about option 2) and not using directConnect is that you may have a specific configuration(s) you want your tests to run on. Say, you have a Windows machine with IE 11 on board and Ubuntu with Firefox 35. In this case, you may configure these machines as selenium nodes which would connect to a selenium server/hub.
If you are running your tests locally and your target browsers are Chrome or/and Firefox, use directConnect, your tests would run faster.
But, if you are running your tests locally and need to test against IE, Safari or other browsers, you'd go with options 1-4 (usually 1), since these browsers cannot work in "direct connect" mode.
See also related topics: