I find it strange that an lbs would recommend you "stay away from a smaller bike with 650c wheels" for performance reasons. If a small bike is what fits you, that is the bike that will perform best for you. If the bike is properly geared, you should be able to get comparable performance out of either size wheel.

I am just over 5' tall, so I had similar challenges finding a bike. I have 650c wheels on my touring bike and I think they're plenty fast. My folding commuter has 20" wheels and they're pretty darn fast, too. Compared to the 650s, I think the 20" wheels pick up speed more quickly and handle quick stops really well, but don't hold momentum as well, which is just fine for city riding. I imagine it's a similar relationship between 650 and 700 wheels, I just don't know if it's as noticeable.

I'm sure there are TE members who race on 650c wheels, too -- hopefully they'll weigh in, if racing is what you're interested in.

Here's a discussion on 650 vs. 700 in racing -- I don't know how good this information is, and some of it is a bit technical, but the gist of it is this: there are some differences, but unless fit is a major issue, the performance is probably negligibe for most riders.
http://www.duathlon.com/forums/experts/66

I suspect the bike shops that are steering you away from 650 wheels don't know much about fitting petite riders, but that's just my opinion.

Good luck with the bike shopping, and keep us posted on what you find! I'm always interested in learning about what else is out there for petite riders.