Losing the loot does seem like a good penalty to balance the power of this mechanic, similar to how Disintegrate (Black Blade of Disaster etc) worked in Baldur's Gate 2.
In most situations there's no loot to loose except a crappy weapon or item. And even with some bosses like the Matriarch, you just don't loose anything.
It does not really "balance" anything and it is not a high level spell you'll use wisely : it is a common bonus action.
Just look at the screenshot above for distance. Not sure anyone would consider that the entire red area as being "near the edges of cliffs"... Especially if you consider in game units of measurement.
