With the switch "OFF" all should be isolated except the bilge pump. The "switchboard" should not be on if the switch is off.
The alternator should be fed to the bank most in need, almost always the house bank. Starting a diesel only takes an AH or less. The other problem is that the charging direction is totally reliant on you. With a properly wired system there is no switching necessary to charge all batteries from any source.
With all due respect, Sir, your series of "shoulds" are not necesarilly "shoulds" at all ... but dogma.
I don't use the 1+2 switch as a battery isolator ... so no, OFF shouldn't isolate all but the bilge pump. I use it as a starter select switch ... so OFF should isolate the starter.
My switchboard has it's own main breaker, located next to this switch ... as well as all the breakers on the switchboard ... it has enough breakers and does not require further isolation from a switch.
The bilge pump, of course, is wired to the house bank and is non-isolable from it (save for it's own AUTO/OFF/MAN switch).
The alternator feeds the starter battery because, with the way I operate and use the boat, that is the only battery that the small alternator has any hope of helping with. It lives in a slip ... I take it out on daysails. The house battery is maintained/charged by the battery charger. The diesel is started only for entering/exiting the slip and is not relied upon (except when necessary) for supplying/charging the house bank.
Thus, the house bank/battery charger and starter battery/alternator are on two seperate 12V buses unless manually combined by the starter switch. I can combine them ... but 99% of the time, do not.
There is no "should". There is certainly no single, "correct" electrical system as you would imply. There is ... a number of different solutions. I don't worry about the position of the switch because I operate it myself. It doesn't operate on it's own.