The player-generated character goes in the first slot and only in the first slot. And you are also right in thinking that the only way to change the order of characters in this game is to dismiss your game-generated player characters in the next four slots is to dismiss them to the Adventurers' Guild and re-engage them in the order you want them to occupy.
The ability to change the order of your characters by highlighting one and Ctrl-clicking on another applies only to MM6. You can't do it in MM7. And the only game in which I know for certain character order matters is MM9. There, you can set the "formation" of your party - I think the keyboard command is either F or Ctrl-F, but I'm not certain of that. It's not well indexed in the manual.
