I've seen this word a few times used to describe armies. I cannot find an explanation for it anywhere! Can anyone explain what it means in reference to an army. Is it to do with the realism of an army/alliance in regards the books?

Essentially, yes

Fluffy as opposed to hard. A hard list being something for trying to win a tournament as easily as possible. A fluffy army basically follows the lore of the world and is more focused on theme and style than strength of playability. Of course, you can have a fluffy army that you try to make as strong as possible, but that's a rough guide.

Gotcha cheers! So a list made to be realistic instead of competitive.

You may sometimes seen it contrasted as fluff vs. crunch, with "crunch" being short for numbercrunching - trying to determine mathematically what the best army is for the points.

Another opposite of "fluff" is sometimes called "cheese" or "beardy".