Right. When you create a New Wallet in Sparrow, it doesn’t initially know anything about what keystores you intend to use to generate addresses and sign transactions.

If you intend to make a new seed, I believe Sparrow calls this a Software keystore. It can generate 12 or 24 word BIP-39 seed phrases for you, and will require you to record them and reenter them.

It’s possible, for example, to make a 2-of-2 where one keystore is your hardware wallet, and the other keystore is a Software keystore. This is kinda like a poor-man’s multivendor multisig. It would require both Sparrow and your hardware device to leak seed material for someone to compromise your coins.