Most people will first make their royal icing and then color it. That way they can make several colors in one go by splitting the first batch. Once you've optimized your royal icing, you don't want the color to change the consistency again! Even a little bit of water can have quite a big impact on the consistency. As such, adding a water-based color at this point probably means that you will have to add extra sugar or egg white and whisk again. That doesn't mean you can't use water-based color. However, it's best to add them at the start and that has its disadvantages as well (see next question!).