I have explained to my members that we are allowing them to have both public (the world, anyone on the internet) content as well as private and just for members (site members only). You might want to create a FAQ for them on this.
Now here is the problem with members profile photos; I consider it a Dolphin bug and have tried to illustrate the problem to AlexT but I don't think he understands. The bug can be recreated on Boonex.com.
Let's say you decide that you don't want public content, your site will be a members only site; therefore you go into the admin and remove the Public privacy group. Now, Dolphin will set the privacy level for new Profile Photos albums to public no matter what because it is hard coded to set it to public. What happens is that none of your members will be able to see other member's profile photos because the privacy level is set to public and there is no public privacy group on your site. I tried to explain to AlexT that it should either be a setting in admin, or it should check to see which privacy groups are active and set accordingly.
For now, your solution; unless you want to make changes in the core files as I did for a private site, is to inform your members that if they don't want their profile photos to be public (viewable by the world) is to change the privacy level to members.