Target only does what it sounds like, the turrets only fire on your current target.
Fire at will means that the turrets will fire on any hostile ship, which can be good for dealing with multiple targets at once. But you have to be careful because they have a habit of spraying every ship nearby, including security ships.
I don't do CZs, only res and CNBs, so it is handy when I take on a wing and my burst lasers are taking on one ship, while I concentrate on the most dangerous one.
It is interesting that you say they (the fire-at-will turrets) will fire at everything in range. I've not had that happen that I know of, and in a CNB I would know realy quick if I engaged one wing and all of a sudden I'm fighting two dozen ships. And that has not happened.
There have been a few rare occasions where I'll be happily shooting at bad guys when all of a sudden I notice I am Wanted for nicking someone who wasn't even in my FOV? Maybe I'll give Target Only a try and see how that works. (I wonder if my SLF will only shoot the target I have highlighted, or will he continue to take on a target's wing-mates?)