Friendly fire is a must.. for many excellent reasons listed above, realism being one of them.
However, we should keep in mind that this is a game and should consider fun to be just as important as realism. Specifically in regards to a way of identifying friend and foe. Considering that magic is present, there should be ways of 'tagging' people you consider friendly, possibly highlighting them with a colored aura, but basically making it a bit easier for ranged people to not accidentally kill their team mates.
Of course, if such a system is implemented, it should only give you the advantage of knowing where friendly units are. For example, you should not be able to 'tag' enemy units with an aura/glow/etc.. as that would give you more of an advantage than merely 'tagging' friendly forces.
I'm planning on being a melee fighter myself, but I definitely see the importance of having some way of quickly and relatively easily identifying friend and foe. Magic gives you your explanation of how this is possible.
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