The set screws are not going to let any water
in, that comes from the end of the cutlass bearing exposed to the sea. I lost
one once when a polypropylene line from a crab pot wrapped around the shaft. Frictional heat melted the line right at the end of the cutlass bearing and didn't allow the cutlass bearing to "see" water. Frictional heat then caused the bearing to fail when it didn't get water.
On most boats I've seen the set screws are simply painted over with bottom paint
. There is no need to fair them since they are ridiculously tiny. So long as they are snug, you're good to go.