Yes, you have to have a FAT32 formatted hard drive (with 32k clusters) in order to use Dios Mios. (Devolution may have different requirements, but I've never used that.
At least in terms of Dios Mios, your Wii games goes into USB:/wbfs and your GC games goes into USB:/games So you are already required to have two separate directories to get it all working.
There is a guide to using Dios Mios in my signature. You also have to have the latest version of the USB Loaders (three of them are also available in my signature)