Hi,
Yes, the issue is that the too-thick seals bind up when you go to set the bearing clearance: "tighten the spindle nut until drag is felt when turning the wheel/hub, then back off one or two flats". When this is done, the too-thick seals are the first thing to drag, long before the bearings are anywhere near where they should be, and engouh that you are fooled into thinking you have the bearing clearance set right. However, as soon as the car goes back on the road all that extra bearing clearance allows a lot of movement, which can cause the front brake caliper pistons to be knocked back into their holes causing the brake pedal to go to the floor next time it's tried, or can even damage the bearings and/or the axle. The felt seal compresses and wears very rapidly and the clearance will become obvious soon, but it might be too late.
Not a lot of seal is needed there, since it's mostly dealing with heavy axle grease that isn't trying all that hard to get out of the hub. The seal just needs to "wipe" the face of the vertical link and, in fact, the thinner, inner edge of the felt that wipes on the very base of the axle probably does most of the actual sealing work. The wider flat area, the part that's being trimmed, might be more of a backup to the primary seal area.
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