You say it's an old house. I suppose that if the siding was practically at the end of it's rope, plastering it with wood filler might extend its life a few years. I helped replace the siding on an old barn once that was practically plastered with putty. I don't know how long that treatment lasted; I only saw the final/end result (zillions of chunks of putty were falling out as the siding was being replaced).
So, I think it's safe to say that wood filler will eventually chip/come off, especially if it was applied over stripper soaked paint. Wood often contracts and expands to a greater degree than wood filler and old wood often erodes, which leads to putty failure. Putty shrinkage might have had something to do with the old barn, but that's something else to be aware of.
Under ideal/indoor conditions putty lasts for a very long time (decades, maybe), but in this case, it's exposed to the outdoor elements. So, I would hope the wood filler lasts for 7 years but I wouldn't expect it to last more than 14 years (it totally depends on too many untold variable). I don't think that this is an immediate problem; you should be okay for a while. But when the time comes, be prepared to replace the siding.
Also, the type of wood makes a difference. Oak, which is hard, will hold the putty better than pine or cedar which is soft. Oak trim is still very common... whereas really old houses might have been built entirely from oak.
It's possible that the contractors are just being lazy or hasty. Yeah, they had to sand it either way- either sand wood filler or sand wood- and sanding wood filler is a little easier. Plastering it all over siding is not usual. However, there may be a justifiable reason, like the siding was beyond saving/sanding, or there were so many cracks, all the way through the wood, that simply can't be sanded (in which case I would ask, why not replace the siding now).
Always ask the contractor for references.